Cooper Energy’s modest $5 million plunge into Mosaic Oil was an example of what might follow over the rest of 2007.
Widespread rationalisation among the flotilla of small central Australian explorers is possible, as is a clean-up of the 30 or 40 small Aussies wandering around the US oil patch.
Drivers for takeover action are easy to spot, if you’re looking. For starters there’s the slide in share prices, which has mirrored the slide in the oil price.
Suddenly, after several years of good times when the capital markets have been easy to tap, investment money has dried up. Investors have become very cautious of companies promising great things as the oil price has slipped from $US70 a barrel into the low $US50 range.
To make matters worse in the oil price department, there has been the rise in the value of the Australian dollar against its American counterpart, which has made the price slide seem that much worse.
Losing access to easy capital via the stock market means that explorers must now do what they’re supposed to do: explorer, discover, develop and pay dividends.
Said quickly and each step sounds easy. Slugcatcher is just grateful that he doesn’t have to do it because discovery (and development) is a tricky business. Far easier to sit on the sidelines and criticise.
But if exploring is your game, then discovery had better follow or it’s essential that growth (or cost saving) be achieved in some other way, which is why mergers and acquisitions suddenly become very attractive.
There are, of course, two other reasons why small oil feels that it’s under pressure, apart from price. It’s the lack of discovery and troubles in the field.
The Harriet Joint Venture’s sudden discovery that it might not have enough gas to meet its sales commitments was a jolt felt throughout the industry.
Until the surprise announcement between Christmas and New Year that all might not be well with the JV’s ability to deliver gas into a 20-year supply contract with Burrup Fertilisers, Harriet had been seen as one of the few independent success stories in a part of the world dominated by the major oil companies.
But to declare a form of “force majeure” and say the event was triggered by the realisation that Harriet had suffered “the failure of certain exploration and development wells” was like a bucket of cold water over the fertiliser plant, and a reminder to investors that oil and gas is an extractive industry prone to “downhole surprises”.
Tap, as Harriet’s sole Australian-listed partner, copped most of the flak, but it is worth noting that Harriet has not been alone in disappointing the market.
The well-publicised problems of Santos in Indonesia have been another source of annoyance to investors, as was the surprise announcement last week that Baraka Petroleum’s highly-promoted onshore Mauritanian well, Heron-1, was finding it hard going and would take longer than the planned three months to drill.
Baraka’s share price barely moved on that news, but the stock had already retreated a long way from its early December peak of 33.5c to currently trade around 21c.
Slugcatcher is not singling out Baraka for criticism, merely pointing out that conditions in the oil game have changed. Capital markets are more wary, discovery is proving elusive, and growth remains imperative for management.
Which all boils down to companies with cash achieving growth by buying companies which have potential, but lack the cash.
In other words, we are entering a period of enhanced M&A activity, and all the fun that it brings to sideline observers as they try to identify the predators and their prey.
