M&A wave will hit Asian oil industry
M&A wave will hit Asian oil industry
SINGAPORE (Reuters): A wave of mergers and acquisitions (M&A)
will hit the Asian oil industry as profits shrink due to
contracting oil demand in the next few years, a U.S. business
consultant said on Tuesday.
"I can tell you a number of companies are now running numbers
on (different) combinations," Michael Balladon, vice president at
A.T. Kearney for Asia oil and gas business told Reuters.
"Everyone has these numbers, it now comes down to the art of
the deal."
A.T. Kearney is a Chicago-based consultancy, which advises
around 30 multi-million dollar corporations based in Southeast
Asia and earned gross fees of $1.1 billion in 1997 for its
worldwide consulting.
Balladon cited that the Occidental Petroleum Corp oil and gas
asset swap with Royal Dutch Shell Group announced last week was
the continuation of a M&A wave.
The process, he said, had begun with smaller deals last year,
with British Petroleum selling out its Thai retail chain to
Caltex and the Shell/Caltex management tie-up of their joint
venture refineries in Thailand.
"What we see is the strong buying over the weak," Balladon
said.
Layering in relatively weak assets of someone else, will allow
the winner to get even stronger as others pull out of the market,
he said.
"The majors will become super-majors in Asia," he predicted.
The drive behind the M&A wave will be shrinking profits as many
companies were very poorly managed and over-invested in the boom-
time, Balladon said.
Asian oil demand, which was forecast to grow at four to six
percent annually before the currency crisis, is now expected to
remain flat for the next few years.
Balladon said that Japan, Asia's biggest oil market, will see
the most severe restructuring and buy-outs.
At least 20-percent of its 5.3 million barrels-per-day (bpd)
refining capacity needs to be shutdown, he said, as investors
will not rush in until they see actual value in Asian oil asset.
"Quality is the name of the game. I do not see a stampede" to
buy, Balladon said.
"The fire sale assets" like that of the retail network in
Thailand and South Korean refineries may also remain unsold and
go bankrupt, he said.
For buyers in Asia, there are sticky issues like hidden
liabilities and the difficulty of buying just the valuable assets
from an integrated oil company.
South Korea's Hanwha Energy sold its power generation business
in late May but was still openly seeking bids for it's Inchon
based 275,000-bpd refinery.
Following the wave of asset consolidation, oil company's
management styles will also undergo radical changes, he said.
In the past, national price regulation regimes, have
encouraged many oil companies to have a country by country
management style, he said.
"But sometimes, you can move products around the region faster
than you can from one end of the same country to another. That
has been a largely untapped benefit."
Asian crisis had already prompted Caltex, a Chevron/Texaco
joint venture to announce in June re-organization along business
lines from its current geographic focus, he cited.
"As region is maturing and liberalizing, there is a lot less
value in working the regulatory side of the equation and there is
a lot more efficiency in management across the region," Balladon
said.