The European oil major Royal Dutch Shell (RDS.A) has recently revealed that it plans to sell nearly $15 billion of its assets as the company requires an additional $55 billion in the next two years for investment in some of its major projects. Although Shell did not specifically mention the kind of assets it could be selling, but it’s an open secret that the oil giant’s $6.4 billion stake in Woodside Petroleum (WOPEY) could be up for grabs. Shell holds a 23% stake in Woodside Petroleum, which is Australia's second biggest oil and gas producer, as Shell’s management no longer feels that Woodside Petroleum is aligned with its long-term growth strategy.
Shell seems to have two options:
1. It can sell its stake back to Woodside, or other institutional investors.
Woodside is a dominant player in Australia’s LNG sector and owns six out of seven LNG processing plants, also called trains, to satisfy the growing demand for cleaner energy. The global demand for LNG is expected to double by 2030, and a significant portion of this growth is going to come from China and India, which I have also highlighted in my previous article.
The energy demand in China has exceeded the domestic supply, which can be attributed to the sluggish growth in production from its mature oil fields. As a result, the country has to rely on expensive imports. To reduce its reliance on foreign oil, the Chinese government, through cheap loans, has been encouraging the local energy companies to invest in overseas assets.
Chinese M&A Appetite
The Chinese energy companies have been making international acquisitions to feed the ever-increasing demand for oil and gas from China. They have spent a significant portion of their investment expenditure on unconventional resources, predominantly in North America’s liquid-rich areas.
According to data compiled by Bloomberg, Chinese companies have spent a staggering $100.7 billion on 83 overseas oil and gas acquisitions over the last five years. This also includes the massive $15.1 billion acquisition of Canada’s Nexen Inc. (NXY) by CNOOC in the beginning of the current year, which was the single largest overseas acquisition by any Chinese company, ever.
More recently, Sinopec has shown interest in purchasing a minority stake in an LNG project located on Canada’s pacific coast and is currently discussing the matter with Apache Corporation (APA). Earlier in October, Apache sold nearly a third of its stake in Egypt’s oil and gas business to Sinopec for $3.1 billion.
Meanwhile, PetroChina (PTR), another leading Chinese energy firm, has recently decided to purchase a 25% stake in West Qurna-1 oil project in Iraq from ExxonMobil (XOM). PetroChina is targeting to get 50% of its output from overseas assets by 2015. As a result, the company, and its parent CNPC, have spent around $37 billion in buying overseas oil and gas assets. The company’s shopping spree, however, is far from over.
Back in 2011, PetroChina announced that it will invest around $60 billion on overseas acquisitions by 2020. By that time, the business would be getting most of its production from outside of China.
A New Target
While analysts believe that Shell would be inclined to sell its stake back to Woodside, or other institutional investors, as opposed to Chinese buyers, this isn’t going to stop the Chinese from making a bid.
Moreover, some analysts have speculated that a Chinese bidder, most likely CNOOC or Sinopec, could move forward with a full takeover of the Australian firm; since this isn’t 2001 any more when Woodside was the only LNG exporter, and due to its importance to the country, the business was not on the acquisition radar of foreign firms.
Moreover, the Australian officials have shown signs of leniency towards Chinese buyers of Australian businesses. Recently, the Australian government has lifted some of the foreign investment conditions that it placed on China’s state-owned coal miner, Yanzhou Coal (YZC), that restricted its ownership of its Australian operations. The business was required to cut its ownership in the Australian business from 100% to less than 70%, as well as its interest in other coal mining assets to below 50% by the end of the current year. The government now, however, has given a green signal to the Chinese coal company to seek complete ownership of its operations.
Due to these factors, it is likely that a bid by either CNOOC or Sinopec would not be blocked by the government.
Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.