Asian investors used to pour over $20 billion into US Lower 48 assets in the period 2010-13, mostly in shale plays – but this cashflow dried up some three years ago and has become “negligible,” particularly on the Permian tight oil play. Wood Mackenzie says this trend is about to change, anticipating some of Asia's largest upstream players “wish to diversify and grow production.”
"There is a window of opportunity for outside investment into plays such as the Permian. The key is identifying the many financially-stretched tight oil operators looking for capital injections to help realise ambitious growth plans," said Adrian Pooh, senior research analyst, Asia upstream.
Many Asian investors come from positions of financial strength, with healthier cash flows and lower leverage and gearing than many international and US oil companies. The huge commercial resources and comparatively low break-evens of US shale oil is, in his view, “a compelling combination,” plus assets are actively traded in the biggest and most dynamic upstream M&A market in the world.
By comparison most pre-development Asian upstream projects lack scale and are located in countries with tougher fiscal terms. "US tight oil offers huge volumes and rapid development cycles, so if Asian players want to grow, they cannot continue to ignore this sector," said Pooh.
Rising cost inflation in tight oil are also likely to further erode margins and increase funding pressures. “And if the oil price weakens, more opportunities will arise as struggling players turn to asset sales to free up capital,” he added.
Although Pooh’s logic seems to be sound, he cautioned there are also reasons why many Asian players remain “reluctant to get involved in such a hot M&A environment.” The fast-moving tight oil market-place is particularly challenging for larger Asian companies who traditionally have long lead-times for decision-making.
The Top20 upstream companies in Asia are heavily invested in conventional plays across the US Lower 48 States, where fields are mature and production is forecast to shrink by 20% over the next decade, Mr Pooh explained. Still, he anticipates that output from the tight oil-driven U.S. unconventional plays will grow exponentially over the same period, but their overall portfolio exposure to the theme is under 1%.
Based on their global upstream portfolio value, Asia's top 20 companies include CNPC, CNOOC, Sinopec, ONGC, INPEX, Petronas, Shaanxi Yanchang, Pertamina, Mitsui, PTTEP, Mitsubishi, JOGMEC, Kogas, KNOC, PetroVietnam, JX Nippon, Sinochem, Oil India, CPC and Marubeni.
During 2010-2013, there were active buyers in shale plays, but most of these deals failed to generate expected levels of value and returns. For some player, bad memories will inhibit a return to US unconventionals.
"While there is room for more US exposure, there also needs to be a clear strategy to navigate through the risks and challenges," says Pooh. “Deal clauses have to be carefully evaluated to avoid value-dilution of assets, while partnering with the right operator is needed to ensure longevity of the project and a sustainable relationship.”