As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.
Luckily, the ups and downs of the African oil and gas trade aren’t one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your risk in the weeks ahead.
Regardless of the industry, periods of low prices are typically the time when the weak get swallowed by the strong.
That’s because when a once resource-rich environment dries up as the high-price tide goes out, company strengths and weaknesses are laid bare for everyone to see and, for some, to exploit.
What’s more, the inability to grow naturally due to a market contraction often leads to only one viable path to get bigger and more profitable — eating other companies and swallowing their market share or merging with them for mutual self-protection.
The last time oil saw an extended period of low prices in the late 1990s, the global industry saw a massive wave of consolidations. BP famously merged with Amoco while Exxon and Mobil joined forces to form the largest oil company in U.S. Chevron snapped up Unocal and Texaco while Conoco and Phillips Petroleum linked up to form the U.S.’s largest pure-play oil producer.
Now, with oil prices once again in the doldrums there is talk the industry might once again see a wave of consolidations. The latest scuttlebutt making the rounds is the possibility that BP, which has African interests stretching from Cairo to Cape Town, could be taken over by its American rival, ExxonMobil.
Although an ExxonMobil-BP merger would be spectacular, much more likely is the huge number of smaller firms being snapped up. This is particularly the case for any companies that have little cash saved, a fair amount of debt, and little in the way of future oil production hedged out.
Some companies that might fit this description are Premier Oil and Tullow Oil. If oil remains below $60 through 2015, both could see their net debt hit three times their EBITDA (earnings before interest, taxes, depreciation and amortization). Many more firms could be similarly vulnerable. Citi analysts estimate that of some 57 major mid-sized exploration and production companies, the median hedging position for their 2015 production was 40 percent.
This means that if prices stay low, the pain in the oil sector is going to be immense. A number will be seeking relief through mergers and acquisitions. Companies with valuable positions such as Tullow in Kenya, but with inadequate financing will be prime targets as larger, better-financed firms seek to grow their positions by snapping up these valuable but distressed companies. Going forward, the next few months will be critical in determining which companies will be able to acquire the resources they need to stay afloat and which will not.
Already some of this drama is beginning to play out. Earlier in December Nigeria’s Seplat made an attempt to take over rival Afren on news that the latter had severe cash flow problems after leveraging itself to the hilt to fund operations for expensive, high-risk exploration work. When prices collapsed, this left Afren in a vulnerable position. Seplat, which had just listed shares in the U.K. and was sitting on $500 million in capital, made a play to buy the company. Although it appears the deal is now off — Afren said Seplat’s offer was, “significantly below the aggregate value of the debt of the company” — the fact it was made at all hints at what might be coming in the African oil and gas space.
Another possible target in the coming wave of mergers and acquisitions is Tullow Oil partner, Africa Oil, which recently announced plans to raise $100 million in new equity through a private placement to fund ongoing appraisal and pre-development work in Kenya’s South Lokichar Basin. The deal is expected to go through in late February and should raise, according to Africa Oil, enough to money fund work that needs to be completed before Tullow and Africa Oil submit development plans for the South Lokichar to the Kenyan government sometime by year’s end.
Africa Oil’s Five-Year Stock Price
Source: Bloomberg
In many respects, Africa Oil is tailor-made for a takeover. Citibank reports it has no producing assets, only a number of potentially valuable leases in places like Kenya, but faces a number of obstacles that include financing troubles and potential legal challenges to its position in Somalia.
The $100-million cash infusion will allow the company to keep operating for the coming year. Its stock is now trading at a level slightly higher than before Africa Oil and Tullow found an estimated 600 million barrels of oil in Kenya. These must make it an attractive target. Given Africa Oil owns half of that find, its current price looks like a steal.
Jeffrey Cavanaugh earned a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFKInsider and Mint Press News.
