turns out that China is not willing to pay whatever it has to for energy and
resource deals have faltered in recent months, indicating an increasingly
choosy Chinese perspective on energy and metal acquisitions. Add to that the
growing concern that the global economy is once again stumbling and that
commodity prices may be near a top, and you have a Chinese deal-making market
that has gone from 60 to zero in no time.
the metals side, observers are seeing a “buyer’s strike,”
where companies are watching commodity prices from the sidelines rather than
making deals. China’s Minmetals Resources,
for example, stepped back from its bid to acquire copper producer Equinox
Minerals after Barrick Gold (NYSE.ABX, T.ABX)
topped Minmetals’ $6.3 billion offer with a
$6.7 billion bid.
was lucky to get the higher Barrick offer; other
companies, like Lundin Mining (T.LUN), have given
up trying to find suitors willing to pay a fair price. In May, the company
announced it couldn’t find an acceptable buyer for all or part of its
copper, nickel, and zinc mines that are spread across Europe and Africa,
citing a gulf between its project valuations and what buyers were willing to
stories signal that there is a limit to how much even the deep-pocketed
Chinese will pay for resources, even though securing resource assets is a
stated national goal.
may be at the heart of the problem. Prices for oil assets in Alberta –
home to the massive oil sands and a raft of light oil and natural gas plays
– have soared: The average price per acre has climbed from C$2,185 in
mid-2010 to C$3,111 today, according to government statistics. The price
increased on the back of a series of international deals: France’s
Total S.A. signed a C$1.75 billion deal with Suncor Energy to develop oil
sands reserves; Malaysia’s Petronas inked a
C$1.07 billion deal for ownership stakes in some Albertan natural gas fields;
and China’s Sinopec spent C$4.6 billion for a 9% stake in Syncrude Canada.
price isn’t the impediment to new deals – the biggest Chinese
investment in Canada’s oil patch to date just fell apart because the
potential partners couldn’t agree on how to work together.
China’s largest oil and gas company, PetroChina
International Investment, and Canada’s Encana
(T.ECA) announced on June 21 that their C$5.4 billion deal to jointly develop
Ridge gas project had fallen apart. The companies couldn’t agree on how
to structure the joint operating agreement, though they did not elaborate on
the specific issues.
Encana will now launch a fresh search for a
new Cutbank partner… or perhaps partners. The
PetroChina deal included stakes in gas production,
reserves, acreages, pipelines, and processing facilities, but Encana now says it wants to split things up, offering a
variety of joint-venture opportunities for portions of the undeveloped resources
and infrastructure requirements while keeping the producing acres for itself.
PetroChina-Encana deal was a bit of a sweetheart in
the industry, often cited to support arguments about China’s growing
interest in Canadian oil and gas. Its failure now supports the opposite
stance: that China is getting pickier about what projects it supports and how
that support plays out.
the first five and a half months of 2011, Canadian energy companies sold a
total of 231 million barrels of oil and gas reserves, less than half the 482
million barrels sold in the same period in 2010. The value of those Canadian
oil and gas deals came in at $11 billion, down 35% from a year earlier
(excluding the failed PetroChina deal). So there
are fewer deals being made.
may not last for long, especially given that a 34-day market slide has left
valuations on the cheap side of average. According to Bloomberg, companies on the
S&P 500 Index will earn 18% more this year than in 2010, but the index
has fallen 6.8% since the end of April. The combination means valuations are
the cheapest they’ve been in 26 years. The index is valued at 8.7 times
cash flow, cheaper than in 81% of occasions since 1998; and it is priced at
2.1 times book value, which is lower than it has traded 90% of the time since
challenge for a buyer right now is to actually ink a deal at current prices,
because most potential targets are still valuing themselves using parameters
pulled from the rich deals of 2010.
will it all pan out? Only time will tell. If commodity prices continue to
slide because of U.S. economic uncertainty, Greek default concerns, and
slowing Chinese demand, deal-making will remain quiet for a while –
until the floor is visible – as no one wants to buy a company today
that will be cheaper tomorrow. If commodity prices rebound, deals will be
back on the table, as no one wants to chase a rising price.
expect the M&A world to remain fairly quiet for the next few months, as
the global economic situation figures itself out. Greece has enough bailout
funding to get through August without defaulting, but there are no guarantees
beyond that. The U.S. Federal Reserve just lowered its growth forecast for
the next two years but still remains confident that the American economy is simply
going through a rough patch. As for China, there are as many analysts
predicting continued double-digit growth as there are anticipating a
significant, inflation-fueled slowdown.
it seems that the age of huge, blind Chinese investments is waning. The Asian
giant has become pickier in its choices and more demanding in its deals, and
why shouldn’t it? After all, we are all relying on China’s
massive population to support global economic growth. It seems reasonable
that such growth should be on China’s terms.
and his energy team supply the most in-depth information on the energy
markets – be it oil and gas, nuclear, coal, solar or geothermal. Read
on to find out more about oil’s future… and the amazing profit
opportunities arising from it. Free
Casey’s Energy Report