Are Mergers and Acquisitions returning to East Africa’s oil space?




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VENTURES AFRICA – An upsurge of Mergers and Acquisition (M&A) in East Africa is coming. Bold prediction maybe. Eni previously indicated a desire farm down its investment interest in the region. But it is the recent news that Anadarko is considering a sale of its oil & gas assets in Mozambique and Tanzania that gives the greatest credence to the prediction.

The Brent price hovers between $60 to $70 and capital spending budgets in the E&P space are down nearly 25% in 2015. East Africa will feel significant pain in the process as many corporate farm down or just outright exit to concentrate their spending in regions, particularly North America, with lower capital requirements and less risky returns.

Investors – E&P companies and private equity firms alike – have waited anxiously for this day. Yet the low oil price environment and capital investment reductions across the E&P space will challenge the ability of buyers and sellers to find comparable ground. There are fewer buyers these days, compared to 2013 and valuations are not clear.

High capital gains taxes in Mozambique and Tanzania are concerning coupled with previous requests for retroactive payments. Ophir is believed to consider the past retroactive tax payment as another driving force in its reconsideration of being in the region.

And what does the LNG market offer as returns in light of the current price outlook? Many analysts currently predict that slowing growth in Asia and Europe combined with continued growth in LNG supply does not bid well for prices in East Africa. Could governments and corporate players renegotiate the risk sharing or structure for investment in local assets?
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Shifting Government Attitudes

LNG projects in both Mozambique and Tanzania have faced challenges for several years as both governments considered alternatives in opening investment and creating partnerships. The recent changes to legislation in Mozambique gives hope to the shifting attitudes among government officials. The entry of a new corporate partner in the E&P space could rejuvenate conversations with governments. It could also push-back timelines as engineering teams change and get up to speed and government officials feel out their new partners.

Still new corporate partners could create opportunity for new and clear project leadership and development. But an injection of new leadership will require an additional injection of new capital. Yet it is very unclear in this climate of reduced capital spending that any corporate partner could meet the expectations of local stakeholders.

Assuming baseline development schedules from 2014, most analysts estimate that $50 to $70 billion is needed before 2020 to meet LNG plans. Raising capital for such projects will require multiple party investment plans and structures to meet the capital demands of operators in the region.

 

Private Equity

The rise of indigenous financiers in the oil & gas space is another potential avenue for financing in the region. As inspirational as West Africa may be in this aspect, the growth of such players are limited in East Africa.

Thus local stakeholders have tossed around the potential entry of more private equity firms into the African E&P space. There is a storyline to follow here. Over the past decade, private equity investment in the energy space has increased dramatically with fundraising reaching an all-time high of $36 billion for energy-focused funds in 2013. Still most of the capital has flowed to North America, particularly the United .

The landscape is changing, highlighted by Carlyle’ commitment of $200 to Discover Exploration – a new E&P company at the time led by the former management team of Cover Energy, the African exploration company that discovered a significant portion of the Tanzanian offshore gas.

Private equity firms will likely continue to cast their gaze toward these markets – i.e., Advanced Finance and Investment Group’s investment into Senegal’s  Elton Oil and Helios Investment Partner’s investment in Eland Oil & Gas and more recently in Impact Oil & Gas,  a pure play Africa oil and gas exploration company. Helios is now even rumoured to be considering a $300 million raise for its first oil focused fund.

All this excitement aside, are PE investors ready to enter the East Africa space and partner with a new corporate partner? And what will be the cost for such a partnership?

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