Emerging Markets Focus
In fact, in the 1Q 2011, the total value of mainly producing assets on the market in Kazakhstan, formally mandated by sell-side advisors for, on average, over a year now, amount to in access of $1 billion.
Now, the supply / demand curve is reaching that point where we see renewed interest by investors to result in a couple of reasonably sized transaction expected to close in February / March, as the “air pocket” between the seller’s expectations (pre credit crunch) and the acquirers’ ability to spend (post credit crunch) has diminished. A couple of these larger deals have been drawn out and reflect the sellers’ dissatisfaction in case of protracted processes involving Chinese potential acquirers.
On a separate note, we also see a number of small cap explorers obtaining funding for higher-risk pure exploration drilling strategies.
DL: What seem to be the most opportunistic acquisition targets?
DN: It is indeed a bold proposition, but Cogito Ergo Sum: there is a case for a “roll-up” of a number of, especially, undervalued onshore properties in Western Kazakhstan, a proven hydrocarbon basin with existing infrastructure. This is a particularly fitting proposition for smaller and medium size acquirers because of the under-developed nature of the country’s smaller onshore resources of well known geologies, relative to the big bets (the likes of Kashagan) that Majors have focused on. Western Kazakhstan was well explored during the Soviet era, the data has been stored and has been successfully used by foreign companies operating there to focus and reduce costs of their 3D campaigns.
DL: Which on-shore prospects offer the highest upside?
DN: A number of onshore assets with substantial resources offer significant financial upside that will come from the conversion of resources into reserves in the next couple of years. These are assets at a stage where a small investment in development and external valuations of discoveries to confirm reserves is required in order to satisfy creditors and raise future development capital.
Whilst, such situations would usually be positioned in the upper right hand corner of the risk / reward matrix, the known character of the local geology and low technical risks, have already allowed for such strategies to obtain financing over the past two years.
We are looking at a number of portfolios where 3D seismic has been applied to the proven hydrocarbon basin, actively de-risking portfolios of low-risk, low-upfront-expenditure prospects with substantial production upside. Rolling up a number of smaller assets of this description would allow a larger acquirer to participate in several licences and diversify exploration risks for investors, in order to obtain a premium over the typical one-asset risk situations of smaller exploration plays, which is the case with most Caspian plays that are publicly traded.
DL: What about producing assets?
DN: The universe of acquisition targets for larger acquirers is case-book, as well. All Kazakhstan-based E&P players fall, quite neatly, into 3 categories: exploration plays, growing early producers and mature producers. When it comes to production, companies operating in Kazakhstan sell approximately 20% of oil in the local market at ca.50% of Brent, and export about 80% of produced oil. Barrel sold in Kazakhstan is less profitable than exported barrel but still much more profitable than, for example, Russian barrel.
This is also why oil prospects in Kazakhstan are safer bets relative to gas prospects; whilst gas producers face uncertainty related gas pricing, as well as gas transportation and processing, oil producers, on the other hand, enjoy clear and stable export price that equals Brent minus a predictable discount that depends on transportation cost from the point of sale to Europe and quality of crude. Also, most producing assets and companies in Kazakhstan have substantial resources that have not migrated to reserves yet offer substantial exploration and development upside.
In conclusion, we do see value for investors in a few carefully selected oil assets higher up the development curve here, as well.
LB Capital companies provide cutting edge strategic advisory service on merger and acquisition (“M&A”) and A&D transactions. We serve corporate clients and governments, as well as a range of institutional and private investors, including sovereign wealth funds in Energy and Natural Resources Sectors.
Dana is Managing Director at LB Capital. Prior to LBC, she was Corporate Director M&A Energy at ABN Amro and Associate Director M&A Energy at UBS Investment Bank in London. She joined UBS Investment Bank in 2004 after working at Lehman Brothers M&A Energy and McKinsey & Company’s Petroleum Practice in London and New York. Dana holds an MBA with concentrations in Finance and Accounting from the William E. Simon Business School, University of Rochester, New York:
http://lb-capital.com/
Drillers and Dealers :::
::: February 2011 Edition
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