Chevron’s plans to acquire Noble Energy — a deal valued at $5 billion, making it the largest merger and acquisition deal since the oil price crash — sent shockwaves across the oil sector on Monday, not only because of its size and the impact on markets from Texas to Equatorial Guinea, but also because the deal is expected to signal a new series of merger and acquisition (M&A) agreements in the oil sector.
In Africa, projects that could be impacted by the merger include the Alen gas monetization project in Equatorial Guinea, where Noble Energy made a final investment decision in 2019, with start-up planned for 2021; as well as movement on the Yolanda discovery in Block 1 offshore Equatorial Guinea and the Yoyo discovery offshore Cameroon, which the two governments agreed in a memorandum of understanding would be jointly developed. The American independent also holds the operating interest in the Doukou Dak block in the South Gabon Basin, offshore Gabon.
“The deal raises a lot of questions, and a lot of issues need to be resolved,” said NJ Ayuk, Chairman of the African Energy Chamber. “There are a lot of unknowns, including the impact on the Yoyo-Yolanda condensate gas field going on between Equatorial Guinea and Cameroon. Is Chevron either going to continue or abandon that? This is a key concern for both countries.”
A primary concern for the Chamber, Ayuk said, is how Chevron will carry forward progress on projects, prioritize local content policies and create new jobs. “Clearly, Noble Energy has struggled with local content and we hope Chevron can do better – integrate more Africans, more African women, and give the nationals true participation and true upward mobility in the projects,” he noted. “Is (the Noble acquisition) a good deal? I think that is for Noble and its shareholders to decide,” Ayuk said. “For us at the Chamber, we are more concerned with it being a good deal for Africans. And while the majors are welcome, at the moment, we need more wildcats, more independents to go after new projects with a lot of hunger, to create a resurgence of exploration activity in Africa.”
According to Jude Kearney, co-Managing Director and co-Founder at Sovereign Energy Group, the deal is a positive step in Equatorial Guinea’s progress.
“From my perspective as an advisor to Equatorial Guinea, clearly Chevron brings some goodwill and resources which can be brought to bear on its new partnership with the country,” said Kearney. “On the Backfill Project, no one had threatened to backdown from the project or given any indication it wasn’t feasible. But having a company with the strength and capacity of Chevron as part of that equation is exceptionally helpful to the project and to the region.”
Is More M&A Activity on the Horizon?
Though the largest deal yet, Chevron’s acquisition of Noble Energy is not the only deal to come through. The second quarter of 2020 saw the lowest quarterly value of M&A since 2009, according to an analysis by data, software, and insights company Enverus, but experts agree more deals will move forward in the coming months.
In smaller, but notable moves, Tullow Oil announced last week that its request for the sale of its interests in Blocks 1, 1A, 2, and 3A in Uganda to French major Total was approved by the requisite majority of its shareholders. Tullow Oil also suspended work in Kenya in May, citing force majeure.
Similarly, FAR Ltd. is attempting to sell 15% of its stake in the $4.2 billion Sangomar oil project offshore Senegal, with the company failing to fund more than $300 million it needs for its share of the project during the oil market collapse. Far defaulted on project contributions in June.
“As time progresses and global markets continue to be stressed, there remains uncertainty around FAR’s ability to conclude a financing option. At this point, a sale or partial sale is a more likely outcome. FAR has run data rooms for this purpose and has had a good level of interest,” said Cath Norman, FAR’s Managing Director, in a statement.
An analysis published by McKinsey & Company in May notes that a “broad restructuring of several upstream basins will likely occur, underpinned by the opportunity created by balance-sheet weaknesses.” The report also points out that aggressive M&A activity could be a move for ‘winners’ of the COVID-19 crisis, and these broad-based consolidation efforts could be led by ‘basin masters’ attempting to drive down costs.
“Winners will emerge with advantaged portfolios that will be resilient to longer-term trends. They should settle for nothing less than the absolutely best positioned assets in upstream, refining, marketing, and petrochemicals,” the McKinsey article says.
Chevron, already a global supermajor, is well-positioned to take advantage of independents’ weaknesses exposed by low oil prices. ExxonMobil is similarly well-positioned.
Of course, the current price environment and lack of oil demand leaves independents throughout the globe in a tough spot. Nigerian independents, for example, were already highly leveraged even before the latest oil price crash.
“The impact is a complete and utter disaster,” Kola Karim, chief executive officer of Shoreline Group, the third-biggest independent in Nigeria, said in an interview with Bloomberg in April. “We’re underwater, without adding the cost of finance. If you add the cost of financing, we’re drowning.”
Meanwhile, Ayuk believes that the African continent is going to see a lot more M&A activity. “Right now, we have a liquidity problem with many African companies. The question is – can we find capital? And not just capital, but patient capital that can shore up these companies until we see demand in the market and start seeing some positive outlooks?”
As the oil sector struggles through arguably the worst crisis in its 100-year history mergers, acquisitions and bankruptcies are expected to continue to the rock sector, globally and in Africa.