Daily Telegraph: Aim market: oil and gas potential M&A targets

By Ben Bland
Last Updated: 12:21am GMT 29/10/2007

The oil and gas sector is set for a major M&A boom with every stock in the sector a possible bid target, according to new research from the corporate finance team at Ernst & Young.

The Alternative Investment Market (Aim) has been relatively quiet in terms of deal flow since the credit crisis hit markets over the summer. But that trend could well be reversed as the 90-plus companies in the oil exploration and production sector seem likely to go through a phase of significant consolidation.

Many of the oil prospectors on Aim are running out of cash, says Ernst & Young, and they will either have to take over rivals or be bought out themselves if they are to have a future.

Alec Carstairs, oil and gas partner at Ernst & Young, says: “A combination of weak share performance and low cash balances means that difficult times are ahead for the oil and gas juniors.

“Many of the Aim oil and gas companies face the prospect of either acquiring or being acquired in order to survive – in the current climate every junior is a potential target.”

The study, which will be released later this week, reveals that 65pc of the Aim oil and gas businesses have less than £10m cash left in the bank to spend on existing opportunities or new projects.

At the same time, around half of the oil and gas juniors on Aim are currently trading below their issue price. That makes it more difficult for them to raise money on decent terms by selling new shares.

Smaller oil companies are finding themselves short on funds partly because the cost of hiring rigs and other vital equipment has surged over recent years, pushed ever higher by unrelenting demand.

“The overheads start to eat into your finances quite quickly if you’re not moving on and making significant finds,” points out John Savage, who heads up the oil and gas transaction department at Ernst & Young.

The consolidation has already begun, with mid-market Cairn Energy snapping up Plectrum Petroleum and MedOil last month. With oil prices soaring to new record highs, the deals are unlikely to be restricted to small-caps, notes John Savage,

Indeed Cairn itself has been rumoured as target for the majors, with its shares jumping by 13pc last week amid market speculation that it was being eyed up by BP.

As well as the European majors (BP, Royal Dutch Shell, Eni, Total), the consolidators could also include sovereign wealth funds and fast-growing oil companies from emerging countries such as India.

Taqa, the cash-rich Abu Dhabi National Energy Company, is likely to be one of those involved. It plans to invest $60bn (£29m) in the energy sector globally by 2012, with a focus on Europe, the Middle East, North Africa and Canada.

“They will not be the only sovereign wealth fund consolidating on Aim,” Mr Savage adds.

A number of Indian energy companies have also been showing an interest in investing in African oil explorers. Burren Energy, which is listed on the main market, has been approached by India’s ONGC-Mittal in the past and the company is thought to be one of those taking another look at Burren.

This Indian enthusiasm for African oil assets is likely to be played on Aim as well, Mr Savage believes.

While he emphasises that the pipeline of deals could take six to 12 months to start flowing, Mr Savage is confident that the Aim oil and gas sector is set for an unparalleled period of mergers and acquisitions.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/29/cxmktrep129.xml

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