Oil E&Ps: spring sales

Sometimes low prices do not attract shoppers. A catalyst is needed: clever marketing, word of mouth, something to give buyers confidence. For energy companies, it may a price increase - in the commodity, if not the companies themselves. Oil is up 39 per cent since January.

Although the international oil majors have stated their intention to cut capital spending - Bernstein thinks it will fall 30 per cent this year - they have begun searching for mergers. The recent Shell bid for BG Group (and rumblings about a bid for BP) make this clear.

Shell's boldness may have every oil boss feeling like a target. And, indeed, most of them are. If big companies are not sure that the oil price has bottomed (and how could they be sure?) they should consider any option that could provide cheap growth or cost savings. International explorer/producers have traded below the potential value of their oil and gas assets recently, an average discount of nearly 50 per cent thinks RBC. That is near decade lows.

Buyers, naturally, will focus on core assets - those highly likely to produce hydrocarbons soon - that could be had at reasonable valuations. Sellers, however, tend to have great faith in their more ambitious projects, which are not certain to produce or are contingent upon added spending or regulatory approvals. They want to be paid full prices for these, too, increasing the price gap with buyers.

European E&Ps have suffered more than their North American counterparts since last summer, perhaps because their assets tend to be riskier. Bernstein notes that since the beginning of 2012 North American E&Ps share prices are up, while European equivalents have fallen more than 30 per cent.

So European E&Ps with the longest-lived assets and lowest production costs should be getting attention soon. Among these are Tullow Oil (African oil), Genel (Kurdistani oil and gas) and Ophir (mostly east African gas).

Shell's bid for BG may have opened the doors on a great Spring sale. European E&Ps may be the first off the clearance rack.

Email the Lex team at [email protected]

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation