Middle Eastern national oil companies (NOCs) are likely to go on buying spree this year and acquire a number of downstream oil companies abroad, a new study has said.
"NOCs accounted for a third of the mergers and acquisition spend in 2006 and the percentage in likely to increase in 2009," Booz & Company (B&C), a global management consultancy group, said in its report titled 'How to live to tell the tale', which predicts that the oil prices will rebound to beyond $100 (Dh367.31) a barrel by the end of 2009.
The report, however, did not name the companies that may resort to aggressive acquisition efforts this year.
In another significant note, B&C said the GCC oil majors may concentrate on their gas projects in 2009. Gas and its condensates hydrocarbons will potentially meet the power needs of a growing population and serve as a feedstock for industries. And, consumption domestic and industrial consumption will still surge in 2009, B&C said.
"Strong players will find opportunities in several areas. For NOCs, merger and acquisition is in the air. NOCs which purchase overseas assets are likely to seek acquisitions of smaller independent firms and should explore opportunities to acquire major players. To compete with IOCs, they must realise their increasing role as drivers of new investment," the report said. Data presented by B&C showed that while the stock valuations of international oil companies depreciated 24 per cent in 2008, that of, oil field services companies (OFSs) depreciated 39 percent. A typical OFS provides services to the petroleum exploration and production industry but does not produce petroleum itself.
Limited exposure of Middle East NOCs to the equity markets gives them a particularly strong position during the crisis, the report said. "Middle East NOCs and, to a lesser degree, Asian upstream companies had limited exposure to equity markets or international financial institutions. Thus, they remain in a good position to continue investment programmes, boosted by robust balance sheets as a result of five years of rising oil prices."
The OFS companies and the Engineering Procurement, and Construction (EPC) companies across the world have been impacted significantly due to the crisis, B&C cautioned. "OFS and EPC companies have been impacted significantly. Many NOCs and IOCs have responded to the falling oil prices by delaying or cancelling projects, or by pressing hard to renegotiate existing or upcoming service contracts – dramatically affecting the market capitalisation of EPC and OFS companies," the report said.
B&C warned that OFS and EPC firms either need more cash to maintain operations, or consider merging with competitors. That commodity prices continue to slide, with a similar trend in petrochemical feed stocks, suggests that the economic slowdown is gaining momentum, it said. "The constrained credit environment is especially challenging for the oil and gas industry, given the industry's capital-intensive nature," Raed Kombargi, a partner at B&C said in a note.
The report said GCC oil majors intentions to delay expansion projects may be unnecessary. "While current prices are still within the hurdle rates for most of their projects, they are being conservative in their capital expenditures and have announced delays in exploration projects," Leila Hoteit, a senior associate at B&C.
The report said the downstream projects – the projects linked to crude refining and supply rather than excavation – have been hit harder during the crisis. B&C analysts feared that the projects work on which did not commence before the onset of the crisis may not begin at all.
"Demand drops have led to cancelled refinery projects, with the demand issue compounded by financing difficulties: Mena downstream projects more reliant on debt (approximately 40 per cent equity) compared to upstream projects, which are normally financed in cash. Financed projects due for completion up to 2012 in Asia and the Middle East are expected to move forward, but those that have not been started will suffer the bulk of the cuts especially among oil projects," the report said.
Gas and infrastructure projects are expected to stay relatively safe, the report said. "Gas has upstaged crude exports as the focus of energy investments in the GCC – bolstered by industrial development and the power needs of a growing population," said Kombargi.
B & C said most of the IOCs and independents had planned their 2009 budgets on relatively higher oil prices ranging in between $ 60 and $ 90 a barrel as compared to the NOCs that expected it to range between $35 and $ 55 a barrel. "IOCs and smaller independents are seeing funding opportunities dry up rapidly, pushing them to cut projects and exploration programs," Kombargi said.