Survival of the Fittest, page-46

Article in today's AFR mentioning potential M&A in the Oil Sector (once POO settles)
Senex and Drillsearch get a mention, and interesting Santos might be a target themselves !!!

The dive in the oil price to near-six-year lows has set the scene for a wave of mergers in the sector, but bankers say the risk that prices will fall further will likely delay activity until later in the year. The collapse in the stock prices across the oil and gas sector has already prompted some players to run the ruler over smaller rivals, although deals will be difficult to reach, sources said.
“Everyone is having a good look but it’s not easy,” one oil M&A banker said. “There’s still a long way to go before you can get a willing seller.”
The slump in the value of Santos, the worst-hit of the larger stocks, is understood to have prompted at least one of its venture partners to run the sums on a potential takeover. The value of Santos has almost halved since August with $7 billion of value cut. The percentage declines for smaller players such as Senex Energy and Horizon Oil have been even greater.
But any of Santos’s foreign-owned partners – which include France’s Total and Japan’s Inpex – would find the Australian company’s mix of assets problematic. There would likely be little interest in Santos’s core domestic gas business, while some of its newer ventures are high cost, sources said.
Still, the need to cut overheads and focus resources on assets with the best prospects amid low oil prices should spur juniors and mid-cap players into action, said Robert Merrick, a partner at Herbert Smith Freehills in Perth, who specialises in energy and mining.
“I suspect everyone from Beach [Energy] down is likely to have a ruler run over them at some point,” he said.
Last year saw the beginnings of an up-tick in M&A, with Roc Oil snatched up by China’s Fosun International, foiling a scrip merger with Horizon.
Drillsearch Energy swallowed smaller Cooper Basin rival Ambassador Oil & Gas after seeing off a challenge from US-listed Magnum Hunter Resources. Nido Petroleum accepted an offer from Thailand’s Bangchak, while just before Christmas struggling NSW coal seam gas player Metgasco tied up with US-focused Elk Petroleum.
Mr Merrick said that while he saw little strategic value in the Metgasco-Elk deal, it highlighted the issues involved.
“What it does evidence is that boards are very conscious of their need to get bigger to meet their work commitments, to reduce corporate overheads and just to be competitive when it comes to bidding rounds and participating in M&A,” he said.
The prolonged oil price slump in the late 1990s triggered a series of mega mergers, including BP’s £30 billion ($56 billion) takeover of Amoco, the $US74 billion merger of Exxon and Mobil and Chevron’s $US45 billion takeover of Texaco.
CHEAPER TO BUY RESERVES RATHER THAN DRILL
Bernstein analyst Neil Beveridge has foreshadowed a revival of M&A in the sector this year as producers find it is cheaper to buy reserves rather than drill for new discoveries and as the industry consolidates to cut costs.
But he and some others are expecting activity to be focused at the asset rather than the corporate level.
“No one has got the balls to do anything in the next three months while the oil price still may not have bottomed,” said one banker.
“People are going to be cautious into the next quarter; everyone is sitting tight.”
Brent oil closed on Friday at $US50.11 a barrel, the lowest since April 2009. Many analysts are not ruling out further falls , although the consensus is for the average price to rise modestly in the June quarter.
Santos is among those studying asset sales to ease pressure on its balance sheet. Analysts suggest its oil interests in Vietnam and Western Australia, or its Victorian gas interests could be sold. It has already been seeking a buyer for part of its NSW coal seam gas project for the past 12 months, one analyst said.
Senex managing director Ian Davies said Senex could also look at sell-downs given its full ownership of most of its ventures.
“It just comes down to if we don’t need 100 per cent, and are we happy with say 60 per cent, and in most of the cases that is absolutely true under all circumstances; [the oil price drop] just accelerates the decision.”
Mr Merrick said he expects interest in Australian assets from private equity and from private Chinese companies such as Fosun and Brightoil Petroleum.
Private equity players such as Harbour Energy and sovereign wealth funds such as Singapore’s Temasek, which owns Pavilion Energy, have also been sniffing around some assets.
Still, the risk of lower prices makes it difficult for sellers to get value.
“I think it’s more a ‘pause and reflect’ for the next few months at least, even on an asset level,” another banker said. “It feels too early, so I think it will be more a story for the second half than the first.”