LONDON - Tighter global credit has forced independent oil companies to sell their North Sea assets cheaply and the trend is set to last until oil prices rally.
Even oil companies with valuable assets have been hit hard by a plunge in oil prices from a record high of more than $147 in July 2008 to around $40 a barrel.
The effects have been made worse by tight credit and falling energy demand.
Small independent upstream companies with existing project developments and insufficient cash flow positions are divesting their assets at attractive valuations, to get immediate access to capital.
"What is happening is that a lot of the players who got ambitious funding at $140 are now in trouble and as a result they represent buying opportunities," Andrew Moorfield, Head of Oil, Gas and Energy at Lloyds TSB Corporate Markets, told Reuters.
Companies with a heavy portfolio of North Sea assets were particularly under pressure because of the high capital intensity of oil fields in the region, and the amount of time required to develop them.
"If they are selling at $40 a barrel or even less, their profit per barrel is quite tight," said Charles Esser, energy analyst at The International Crisis group.
ATTRACTIVE VALUATIONS
Many upstream independent firms have started to get funding through asset sales or asset swaps, where attractive valuations are shifting power away from seller to buyer.
Canadian oil exploration company Oilexco (OIL.TO) placed its North Sea operations, its primary assets, under British bankruptcy protection in January after it was unable to get credit.
Rhodri Thomas, upstream analyst at Wood Mackenzie in London, said the credit crunch had created a unique set of circumstances where cash-rich companies looking for investment opportunities were able to take advantage of companies in need of funding.
"We are likely to see more examples as companies struggle to finance sales," Thomas said. "The sale of Oilexco's assets has been driven down by the deteriorating environment, but the assets in its portfolio are definitely of interest to other companies."
Analysts said although each company's assets needed to be carefully evaluated, 2009 was likely to see more upstream independents willing to sell assets at a greater discount because they lacked revenue.
"I expect there will be some other relatively small independents in high production cost areas, that because of cash-flow/investment needs and attractive valuations, will be targets for partial or whole acquisition," Esser said.
Over the past 10 years there has been a proliferation of small independent companies starting up. In Britain, there are around 162 companies, up from around 60 in 1999, but those yet to start production might disappear, analysts said.
However, companies with stronger cash-flow positions are likely to develop existing assets of producing companies, rather than develop new ones.
"We may see more consolidation, particularly by companies that do not have cash on hand and see attractive valuations on assets already developed," said Esser.
North Sea-focused oil and gas explorer Ithaca Energy Inc (IAE.V) sold a partial interest in all its oil and gas licences to Dyas UK Ltd in November 2008, with Dyas to provide Ithaca with a convertible loan facility, valued around $60 million.
German oil and gas company Wintershall, a unit of German chemical group BASF (BASF.DE), bought Norwegian oil company Revus Energy ASA's (RVEYF.PK) in December 2008, in a deal valued around $740 million.
The acquisition will boost Wintershall's efforts to develop assets in Norway and help fund Revus Energy's existing project developments.
"They (upstream independents) are not looking to sit still on the assets they are acquiring," said Thomas. "A lot of these assets tend to be in portfolios with developments required on them, so it's not a hugely negative story for the sector as a whole."
Even oil companies with valuable assets have been hit hard by a plunge in oil prices from a record high of more than $147 in July 2008 to around $40 a barrel.
The effects have been made worse by tight credit and falling energy demand.
Small independent upstream companies with existing project developments and insufficient cash flow positions are divesting their assets at attractive valuations, to get immediate access to capital.
"What is happening is that a lot of the players who got ambitious funding at $140 are now in trouble and as a result they represent buying opportunities," Andrew Moorfield, Head of Oil, Gas and Energy at Lloyds TSB Corporate Markets, told Reuters.
Companies with a heavy portfolio of North Sea assets were particularly under pressure because of the high capital intensity of oil fields in the region, and the amount of time required to develop them.
"If they are selling at $40 a barrel or even less, their profit per barrel is quite tight," said Charles Esser, energy analyst at The International Crisis group.
ATTRACTIVE VALUATIONS
Many upstream independent firms have started to get funding through asset sales or asset swaps, where attractive valuations are shifting power away from seller to buyer.
Canadian oil exploration company Oilexco (OIL.TO) placed its North Sea operations, its primary assets, under British bankruptcy protection in January after it was unable to get credit.
Rhodri Thomas, upstream analyst at Wood Mackenzie in London, said the credit crunch had created a unique set of circumstances where cash-rich companies looking for investment opportunities were able to take advantage of companies in need of funding.
"We are likely to see more examples as companies struggle to finance sales," Thomas said. "The sale of Oilexco's assets has been driven down by the deteriorating environment, but the assets in its portfolio are definitely of interest to other companies."
Analysts said although each company's assets needed to be carefully evaluated, 2009 was likely to see more upstream independents willing to sell assets at a greater discount because they lacked revenue.
"I expect there will be some other relatively small independents in high production cost areas, that because of cash-flow/investment needs and attractive valuations, will be targets for partial or whole acquisition," Esser said.
Over the past 10 years there has been a proliferation of small independent companies starting up. In Britain, there are around 162 companies, up from around 60 in 1999, but those yet to start production might disappear, analysts said.
However, companies with stronger cash-flow positions are likely to develop existing assets of producing companies, rather than develop new ones.
"We may see more consolidation, particularly by companies that do not have cash on hand and see attractive valuations on assets already developed," said Esser.
North Sea-focused oil and gas explorer Ithaca Energy Inc (IAE.V) sold a partial interest in all its oil and gas licences to Dyas UK Ltd in November 2008, with Dyas to provide Ithaca with a convertible loan facility, valued around $60 million.
German oil and gas company Wintershall, a unit of German chemical group BASF (BASF.DE), bought Norwegian oil company Revus Energy ASA's (RVEYF.PK) in December 2008, in a deal valued around $740 million.
The acquisition will boost Wintershall's efforts to develop assets in Norway and help fund Revus Energy's existing project developments.
"They (upstream independents) are not looking to sit still on the assets they are acquiring," said Thomas. "A lot of these assets tend to be in portfolios with developments required on them, so it's not a hugely negative story for the sector as a whole."
