China’s big commodity companies could instigate another round of global mergers and acquisitions to help meet the country’s long-term objectives at a time of market weakness, said Hernan Cristerna, JP Morgan’s global co-head of M&A.
Speaking to FinanceAsia during a visit to Hong Kong, Cristerna predicted a “continued increase” in M&A in 2016 over the record $1.27 trillion-worth of deals seen in the Asia-Pacific region last year, according to data provider Dealogic.
He said he believes Chinese state-owned enterprises in particular are likely to initiate consolidation in the oil and gas sector after two quiet years.
“The sector we are focusing most closely on [in Asia-related M&A] is oil and gas,” Cristerna told FinanceAsia. “Fundamentally there is excess capacity in the world and it requires consolidation.”
China’s economy may be slowing but its overall electricity consumption continues to rise – albeit at a slower pace than the country’s official GDP growth rate. And much of its production depends on oil and gas that it has to import. So because Beijing's long-term focus remains fixed on energy security, the country's SOEs are likely to remain active in offshore acquisitions, Cristerna said.
Cristerna said the big issue preventing such M&A to date was the lack of certainty about the direction in which oil and gas prices would move over the coming months.
“If there’s no consensus about whether oil will be worth $30, $40, $50, $70 or $80 [per barrel], how can you value a company?” he asked, rhetorically. “Companies are not concerned whether there is a high or a low consensus, as long as there is one.”
Stabilising
But that is now changing as the market stabilises. “We hope through the course of this year we will see more of a consensus emerge, and it seems likely [for the foreseeable future] oil will remain closer to $50 than to $100,” Cristerna said.
Growing confidence in the range-bound nature of oil and gas prices will likely help to solidify China's energy acquisition plans and spur the country's SOEs into buying, whereas it’s unlikely to provide enough comfort to their publicly traded international rivals.
For Cristerna, "now looks like a decent time to consider M&A" for companies such as China's SOEs, which are not subject to immediate investor scrutiny and could therefore think in terms of years rather than quarters.
Oil and gas companies have seen their valuations fall over the past year, along with the price of the products they sell. Royal Dutch Shell’s share price has dropped by more than 26% since the beginning of 2015, whilst Exxon Mobil’s is down almost 14% and BP’s down 24%.
Potential sellers are likely to demand premiums to their current market valuations in the belief that today’s prices are near the bottom of the oil and gas cycle. However, Chinese companies will still be able to acquire companies or individual assets a lot more cheaply than, say, two years ago.
Cristerna declined to specify any companies that could be targets for Chinese buyers, beyond noting that they would likely look towards larger targets.
Quiet times
China’s energy companies have been quiet for the last two years. They announced $6.75 billion in outbound M&A in 2015 and just $3.45 billion in 2014, according to Dealogic.
That compares to $21.7 billion in 2013, when Cnooc acquired Canadian oil sands company Nexen for $15.1 billion. The acquisition was something of a flop in retrospect, given the slump in oil and gas prices seen in the years since.
Oil sands production is expensive and requires a high oil price to be profitable. When Cnooc acquired Nexen, the price of oil was at around $100 a barrel and some banks were predicting it could rise to $150 or even $200. Instead it dived to as low $27 a barrel by February 2016. Nexen cut 400 workers in 2015 in response to falling oil prices.
There are already signs of consolidation within commodity industries. China National Chemical Corporation’s (ChemChina) $43 billion takeover bid for Swiss fertiliser and seed maker Syngenta is one example.
Syngenta was previously approached by US rival Monsanto in 2015 but rejected its advances. In contrast, Syngenta's board has approved the bid by ChemChina, subject to regulatory approval, not least from US foreign investment watchdog CFIUS.
JP Morgan is advising Syngenta on its M&A discussions with ChemChina but Cristerna declined to discuss the deal.
Aside from energy M&A, Cristerna said JP Morgan believes Chinese companies will spearhead rising Asian appetite to buy media, manufacturing, consumer goods, and retail assets, as the country continues to seek access to better technology and manufacturing capabilities and to source more products for internal consumption.
“We anticipate a continued increase in overall Asian M&A volumes this year,” he said.
