Oil Search on acquisition trail
- THE AUSTRALIAN
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Oil Search managing director Peter Botten says the company is looking for growth opportunities and expects deal activity to pick up in the second half of the year, describing the industry as “unsustainable” with oil at $US30 a barrel.
Speaking at the Credit Suisse’s Asian Investment Conference in Hong Kong, Mr Botten said it was “inevitable” LNG customers would seek to renegotiate long-term contracts should contract prices — which are linked to oil — remain well above suppressed “spot” prices.
“Clearly in the next couple of years the temptation, if contract pricing is substantially above spot pricing, you’re going to see pressure on renegotiations …. pressure on customers going to spot, and that’s inevitable in the next couple of years,” Mr Botten said.
The comments are likely to fuel concerns among investors about the sanctity of long-term offtake contracts.
His comments also contrast with those of Citi analysts who last month argued contracts would hold up and that the likes of Oil Search, Woodside Petroleum and Origin Energy were exposed to earnings risk by not being covered by long-term contracts.
Fereidun Fesharaki, chairman of FACTS Global Energy, said Chinese and Indian customers were most likely to try to tweak contracts compared to the Japanese, Korean and Taiwanese, but predicted few major price renegotiations.
After a pullback in the oil price in the past week to around $US35, Mr Botten said he expected ongoing softness. “The oil and gas sector is not sustainable in a $US30 barrel oil price for any length of time,” he said.
“I think this is a really healthy thing for the oil and gas business to go through. There were a lot of projects that shouldn’t have been sanctioned in a $US110 world. I think there was a lot of fat and cost inefficiencies built into the sector at a $US110.”
Dr Fesharaki said “high oil prices make you stupid” and it would take at least 10 years to breach $US100 again.
“This is an environment where people need to get thin and they need to accept the long-term world is a $US50, $US60, $US70 oil price — it’s not a $120 world. The demand growth will solve this more than supply restrictions, but we need time for that,” he said.
Mr Botten said Oil Search, which last year fended off an $11.6 billion takeover bid by Woodside, was looking for growth opportunities, and predicted more deals in the industry.
“The buy sell spread for M&A is definitely closing and I think in the second half of this year we’ll see a range of deals that will get across the line,” he said. “It has taken some time for that spread to close. It’s a really good opportunity, especially where companies are in stress, to pick and choose over those assets.
