Demonstrators attending a Feb. 2011 protest at Baghdad's Tahrir Square carry signs demanding that oil revenues directly benefit the Iraqi people. (BEN VAN HEUVELEN/Iraq Oil Report)
By CONTRIBUTING ANALYST JOHNNY WEST
Published October 18, 2011
With its imminent surge in oil production, Iraq is more vulnerable than ever to the "resource curse." The influx of wealth threatens to distort the economy and deepen ethno-sectarian divisions by fuelling a political culture of rent-seeking, patronage, and corruption.
To forestall the worst effects of this problem, Iraq should distribute some of its oil revenues directly to the people. A properly structured dividend could address several of the country's critical development needs all at once...
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Hub; It is normal for drilling time to decrease rapidly after the first few wells. This is observed in virtually every new oil province; drilling management get honed, information is shared between operators, gross mistakes are identified and eliminated, drilling strategy and technology selection improve, service companies accumulate experience, drilling crews zero into the structure, bit selection and general drilling ops are better, formation information and pressure data accumulate, logistics improve etc. etc. It all increments and shaves the time. We will soon reach diminishing returns where it all becomes routine and predictable. Roll on that day.
Re: SH-4
ChapinAfrica
18
Very good point Hub,.....
The drill has barely taken 5 months. Amazing speed. I guess the question is...why has the drill bit gone like a knife through butter when SH-2 has looked laboured in comparison?
Is it a better rig? Is the structure less fractured towards the flanks?
or
Maybe the GKP drilling team, could just be getting the knack of understanding the material they are actually drilling through,..different design drill bits to suit the various layers more cuttig than grinding,...just my simple opinion.
GKP have bought themselves a very large protective buffer with the $200 million placing,...against:- 1. a cheap T/O,.... and 2 rushing out any news,....i would not expect any news soon in all honesty,.....they are going to build up a formidable picture of the subterreanean landscape when the SH4 - 3D Siesmics - SH2 - SA1 - results when all are done and dusted,....add MOL's long awaited results from Bekhme,and possibly the 1st BB drill showings, Vallares want the world to know what they have bought and as quick as possible,...maybe to finance the next phase on the back of some very good early results, the plot just gets thicker,.....and thicker.
The waiting is torturous on the nervous system,.....i would just love to know 24 hrs in advance when that IOC or NOC will make the first bid,.......time machine required though,.....we can all dream.
AIMOVHO.
====
Re: Mirabaud > valuation hints
GKP.L
80
So let me get this right.....
Mirabaud says: 'The well
Assuming they are using the estimated OIP figure of 1.5 billion used in the RNS, a predicted recovery factor of one-third (estimated by management) and GKP's 40% Working interest in Ber Bahr, this would mean:
1.5 billion OIIP x 33.3% RF x 40% WI = 200 million barrels of predicted Reserves...
have a value of 854 million shares x 106p = approximately £ 900 million.
So each barrel of reserves (in Mirabaud's eyes) is worth about £4.50 or $7.20, very much in keeping with previous analysis on this BB (bulletin board that is, not Ber bahr!)
Also, TH/Vallares paid Genel about $5.90 per barrel for reserves ( headline figure) but, when taking into account contingent resources, this figure reduced down to about $3.60, I believe, in what amounted to a fire-sale.
$3.60 is therefore HALF the Mirabaud estimate for the value of each barrel of reserves to GKP,and fits very well with the concept of leaving 'something for the next man', or if we had no choice but to sell.
So, I think we now have further confirmation of just what a 'barrel of oil reserves' is likely to be worth to an IOC in a T/O situation (Note that an NOC might pay significantly more than this $3.60... maybe even somewhere near to Mirabaud's $7.20!).
All we need now IMHO is therefore some confirmation of those elusive recovery factors and we are away. That and the equally elusive Oil & Gas Law, that is!
Incidentally, Spidy's NAV calculator
http://www.navcalculator.com/GKP_NAV.php
already puts a net $3.60 valuation on each barrel of Oil reserves, so you have a pretty good ready -reckoner of GKP's current valuation if you input the figures from RNS's that we have seen to date.
Okay, the SP might say 135p right now but, contrary to what some people say, 'the market' is not always the best means of assessing a company's true worth. In this case, I think it is very obvious just how wrong it can be. We have to accept it though - the market does not necessarily play fair, and we may NEVER see fair value for GKP until T/O.
However, given the prize that should arise at the end of it, I certainly won't be getting off the GKP express.. even for a moment.. until it reaches its final destination, irrespective of some of the blots on the landscape that we may have to witness along the way.
GLA, scaramouche
CiA
====
Tue 07:32
Re: RNS-Spud of BB-1> END GAME
GKP.L
82
Excellent news which seem to have been precipitated by TH/Vallares moving into Kurdistan and partnering Genel.
Remember that only a few months ago there seemed virtually no possibility that Genel would get to work on BB, which meant that GKP could ecxpect to gain very little from that prospect.
Interesting comments from JG:
1. "The IMMEDIATE PROXIMITY of the Ber Bahr block to our major discovery at Shaikan, as well as to Sheikh Adi, makes the Ber Bahr-1 spudding very exciting news."
Is this another hint of the ONE STRUCTURE that is expected to comprise SH, SA and BB? (Note that AB is not referred to in this reference, so presumably seen as a separate structure).
2. " Our ambitious plans, underpinned by the successful fund-raisings in 2010-2011, include acquisition of 3D SEISMIC data over the Ber Bahr block."
So, on top of 3D seismic for Shaikan and SheikhAdi with results due by the end of November (please keep promises this time, GKP!) we will now have 3D seismic data for Ber Bahr, again suggesting a probable 'connected' structure - 3D seismic was not done for AB as far as I know.
IMHO, BB-1 could be the most important exploration well of all.... with GKP having a 40% interest, Ber Bahr potentially dwarfing the other licences in terms of OIP, and yet having only 2100 metres target depth.... so, within only a few short months the END GAME could be very much in sight.
GLA, scaramouche
====
Re: Takeover premium > Cam
GKP.L
39
Hi Cameronian,
Good of you to draw attention to my post of 6/7/2011...
http://www.iii.co.uk/investment/detail/?display=discussion&code=cotn%3AGKP.L&thread=8498886&threshold=0&it=le&action=detail&id=8499225
in which I stated....
‘Hi MrAverage,
You are absolutely right - I did hold Sibir Energy... and they were Taken over for 500p per share, while still suspended at 173.5p.
Perhaps more importantly though, less than 12 months earlier, they were about 25p. So, anyone lucky enough to hold them from that level got a 20-bagger!
Sadly, my average was 100p.... almost exactly the same as my average for GKP! And these were about 65p about 12 months ago.
Always best to look at the full picture, I think!’
---------------------------------------------------------
I think it shows very clearly that T/O premiums way in excess of 55% do happen, and that the price a share is, at any particular point in time, often bears no relation to what it is taken out for.
One point that might also have escaped you is that Sibir shares never actually came back from suspension, so there was NO OPPORTUNITY for anyone who was out of Sibir (or shorting it ) to get back in before the T/O happened. Ouch!!
I always wonder whether the same could happen with GKP, in that the share could be suspended pending major news.... and then that ‘shock and awe’ announcement that all real shareholders are waiting for could arise. Surely, with every day that passes, the risk of this happening increases.
Of course, you may not believe that this is very likely, but Sibir Energy was exactly the EVIDENCE you were after to show that it can.... and does.
So, thank you, Cameronian, for reminding me of my prior research – it saved me having to look for it again! Good luck with your 'investments'.
GLA, scaramouche
======
Today's news:
'By Colin McClelland and Bradley Olson
Oct. 10 (Bloomberg) -- China Petrochemical Corp., the country’s biggest refiner, has agreed to buy Canada’s Daylight Energy Ltd., an oil and natural gas production company, for about C$2.2 billion ($2.11 billion) in cash.
The offer of C$10.08 per share from China Petrochemical, known as Sinopec, is more than double Daylight’s closing price of C$4.59 on Oct. 7, the company said in a statement yesterday.'
===
Author scaramouche View Profile | Add to favourites | Ignore
Date posted 2011-10-05 14:08
Subject The Toughest hold ever.. but worth it!
Votes for this Posting Voted 85 times.
Message
Although I am not in Miny’s camp on this occasion, I do believe that he should be applauded for highlighting he way in which many small investors and some institutions might think faced with a low-ball takeover offer.
About 3 weeks ago, everyone was in positive mood, as the SP rose to about 190p intra-day and GKP announced its strategic plans (including a 440,000 bopd pipeline), and told us all that it was fully funded. The likelihood of anyone accepting a low offer then seemed to have been put to bed indefinitely.
Then we had the placing at 140p which surprised many (myself included) and seemed to put a damper on all previous positivity, even though the placing amounted to just about 10% of the shares in issue... and has given GKP a huge injection of funds.
Anyone would then have expected that 91 million shares placed at 140p with the placing over-subscribed (plus the 78 million shares placed at 140p last October) would have at least put a floor on the SP of around 140p.
But not a bit of it!
Further global turmoil in the financial markets has seen the SP crash through ‘the floor’ to around 120p yesteday, and only now (after a rebound on the DOW) have we seen the SP restored to about 134p... still incredibly low (Note: the LOWEST broker target is about one-third higher than it is now, and GS have a 390p target) .
As Woooody pointed out, how rational is it that institutions who wanted to buy at 140p and couldn’t now seem reluctant to buy in at significantly less than that figure. It certainly is a crazy mixed-up turbulent world!!
The reason is perhaps that so many investors are fickle, or have turned into would-be traders. One day they would dismiss any low-ball offer out of hand and hold out for fair value, the next they would take £3 if it was offered there and then. Our very own 3Dimensional seems to have fallen prey to this emotional roller-coaster we ride every day, after being perhaps the most upbeat about this share amongst us for many months.
But does all this make us vulnerable to a low-ball bid when the markets are very volatile and could be heading for recession one day or set for a market recovery the next? Personally, I don’t think so.
Encore Oil was in a totally different situation to us – it would have struggled to raise finance in today’s world and was a long way off becoming a producer. Premier Oil recognised the weakness and offered a solution to the Board and the shareholders – a 55% premium on the SP, or a share in the future fortunes of Premier. I imagine many will opt for the latter.
The Vallares/Genel deal was a closer comparison to GKP as all of the assets are in Kurdistan and it is a company still with huge growth potential. But even this is a flawed comparison as Genel was cash-strapped and TH was offering its holders the opportunity to share in the future of the company. But, in return, TH wanted to buy them on the cheap.
GKP is completely different. It is now well-funded for the whole of 2012 after the $200 million placing. It has the prospect of an ever-increasing income stream from production (whether for the local market or exports. It still has the little matter of the BIR’s for Shaikan to be concluded. And it now has the prospect of obtaining fair value for Akri-Bijeel once the results from Bekhme-1 come in. And the news flow stacked up is quite extraordinary, all subject of course to the impact of the Oil & Gas law whenever that gets agreed.
To my mind, the FIRST truly valid benchmark will therefore be what GKP get when their share of AB is sold, as it should enable us to price what each barrel of Kurdistan oil ‘reserves’ commands in today’s market place.
Another key ingredient will be which type of company makes the offer that is too good to be refused. Will it be a Vallares type of arrangement, an IOC like Chevron or ConocoPhillips, or an NOC like Sinopec or KNOC? All are possible, especially as Ewen said a week or two ago that there had already been several enquiries.
IMHO, it is essential to understand that, by discussing T/O of GKP now, we are really getting much too far ahead of ourselves.
AB will give us the initial benchmark (and we should learn more about it in the next 90 days), and it will buy TK enough time to get the full results from Shaikan and Sheikh Adi and announce the 3D seismic. The proceeds will also make GKP cash rich, and should allow Ber Bahr to be drilled, plus the confirmation of whether or not we do have ‘one structure’ and the ‘full to spill scenario’ that is often mooted.
There is therefore IMO absolutely no point in considering ANY offer until those landmark events have been reached, unless perhaps the offer is a ratcheted one whereby a formula is applied to assess the value of GKP based on proven and contingent resources at a specified date.
Obviously, everyone is very impatient but, if you don’t need to sell, why would you want anything else but the receipt of fair value? You don’t have access to all the data that GKP and a would-be buyer would see, and nor do I – but TK does, and he now has at least one new strong NED to keep his possible maverick tendencies in check.
The NEDs will be there to look after shareholder interests and we should look out for their appointment in due course, presumably sooner rather than later if GKP is to seek inclusion in the FTSE in December.
So, while I used to say I wouldn’t sell until TK said we should - now I would say ’not until the BoD recommends it’... as I really don’t think it will be entirely TK’s decision. And as I doubt very much that THEY will recommend any T/O bid until Ber Bahr is drilled and appraised... around mid-2012, nor should we!
Yes, GKP is probably 'the Toughest HOLD' ever (it certainly has been for me). But, as always, unless you are a trader, patience has to be the key. I still have a fair amount of it!
GLA, scaramouche
================
Author scaramouche View Profile | Add to favourites | Ignore
Date posted today 11:41
Subject Putting the Cat among the Pigeons...
Votes for this Posting Voted 62 times.
Message
Well, as I always say – there is never a dull moment with GKP!
The weekend has only just started and we have already seen a series of articles/ snippets in the press referring to what has become the perennial favourite amongst investors in AIM shares.
Personally, I have to admit that I am becoming quite a fan of The Times’ Tim Webb , as here is apparently a journalist who produces, well-written, balanced articles, which are highly informative, insightful, up-to-date and quote his sources directly. He also tells the readership exactly how it is with investing in Iraqi Kurdistan – giving both the rough and the smooth. That is exactly what we want, and something that is often sadly missing from the normal GKP media coverage.
By contrast, we seem consistently to get shoddy journalism from others, referencing unsubstantiated rumours, unattributable sources, and offering inexplicable and non-specific valuations. Anyone worth their salt would surely have looked into the credibility of the ‘180p bid rumour’ before going to print, and explained exactly what it was founded upon.
The contrast in the standard of journalism is stark – but at least there is someone out there, Tim Webb, who deserves to be commended for his efforts. Well done,Tim!
Regarding the T/O bid rumour itself, I guess that with GKP you cannot rule anything out, although I doubt very much that it has any validity whatsoever.
Think instead about the psychology that has been applied to our own assessment of fair value for GKP in the last 12 months...
The SP rose to around £2 on 2nd November last year on the back of, you guessed it, another unsubstantiated rumour (see end of following link)
http://www.telegraph.co.uk/finance/markets/marketreport/8105986/Market-Report-Takeover-talk-pushes-up-Olympic-Games-advisor-RPS.html
GKP was forced to deny this by RNS on 3 November 2010 – “The Board of Gulf Keystone notes recent press speculation, and confirms that it has not received any approaches regarding a possible offer for the Company”.
We have subsequently seen a whole variety of seemingly out-of-the-ordinary events which have affected our perception of GKP (or more specifically Todd Kozel) – the Excalibur affair, the Kozels’ divorce and alleged impropriety, and the much criticised excessive pay and benefits package awarded to the BoD. And in the course of this time the SP has struggled to get close to the levels it achieved a year ago, and currently languishes at 137.5p.
But, on this board, we can be our own worst enemy, over-estimating the importance of these factors and giving too much credence to unsubstantiated rumours.
Many of the de-ramping brigade often tell us that the market is right and the SP of 137.5p or whatever is deservedly where it is, and we choose to indulge them by responding to their completely unfounded comments.... instead of putting them on Ignore where they belong.
My position, like that of Investor48, Dalesmann, GRH1 and many more does not however change. IMO, GKP is a company whose fundamentals have improved enormously since the time it was trading at £2 per share with a market cap of £1.5 billion, and those fundamentals are what we need to be concentrating on, as they are ultimately what GKP’s value will be calculated against.
Unfortunately, the more sordid elements of the press seem entirely unable or unwilling to grasp this concept.
First, the Sunday Times said on 28 August 2011 that GKP was up for sale with a price tag of around £1.4 billion, and GKP was forced to issue an RNS to on 30 August 2011 deny it:
“Whilst the Board does not normally comment on speculation, the Company confirms that it remains committed to creating value for shareholders, via the continuing 2011/2012 drilling programme on its world-class assets in the Kurdistan Region of Iraq. Whilst there is clearly increasing interest in the region in which Gulf Keystone operates, the Board is NOT in discussions with regard to a sale of the Company”
TK even then went on CNBC on 31 August 2011 and, in response to the very first question, stated:. “There are absolutely no deals in the offing – we are not... we are NOT up for sale right now”.
And now, about 8 weeks later, we find the Independent talking of a rumoured bid of £1.80 per share (equivalent to a market cap of £1.5 billion), and the Times follows suit with a rumour of £1.80 - £2 per share (a maximum of £1.7 billion). They don't give up, do they!
Personally, I think that TK should again issue a denial... BUT use the opportunity to reference what it is realistically expecting to get for the sale of its minority interest in Akri- Bijeel when the Bekhme results are in (due I think in about 2 months time). Now that really would put the cat among the pigeons!
Of course, given that the SP is still below the 140p placings both of October 2010 (78 million shares) and September 2011 (91 million shares), it is an almost inescapable conclusion that psychology is likely to play its part. Someone’s strategy may have been to get PIs to believe that since GKP is only priced at <140p, a bid of 180-200p might be realistic.
Maybe the hypothetical bidder is thinking that they could raise their bid to £3/ £4 and expect to be successful. After all, PI psychology would ensure that these boards were full of the view that it was way in excess of the initial talked about bid and so might be very hard to resist.
But, if that is what ‘someone’ thinks, IMO they are completely wrong.
GKP will, I believe, ultimately be valued based on the assets it has discovered and proved up to some degree or other – both 2P reserves, and contingent resources - just like TH/Vallares have done with Genel. The valuation will be adjusted according to the buyer’s view of the political risk at that time, not the SP itself.
And it should never be forgotten that a bid of the kind of level described is also likely to flush out possible suitors like Conoco Philllips and Chevron amongst the IOCs, or Sinopec and KNOC amongst the NOCs, who will not want to be waiting on the sidelines while GKP’s enormous assets are transferred to another party. IMHO there WILL be a Bidding War, and it will be dramatic when it happens but probably not until BB-1 and hopefully SH-6 have been drilled.
Of course, it is also possible that the weekend press is simply having its usual bit of fun with GKP, hoping to re-invigorate a share whose SP has seemingly stagnated around the 140p placing price, while those in receipt of shares in the placing are looking for some quick return on their investment.
Irrespective of the motivation or basis for the latest T/O bid rumour of 180p, I have no doubt whatsoever that GKP will eventually go for many multiples of that.
AIMHO and please DYOR.
GLA, scaramouche
============
Author Fruit n Veg View Profile | Add to favourites | Ignore
Date posted today 11:09
Subject Re: A High of 137.9p View parent message
Votes for this Posting Voted 55 times.
Message
Mikey
I don’t blame anyone for feeling short-changed here but the key words are (1) RISK and (2) RETURN.
This stock hasn’t delivered a brass farthing in dividends. Compare that with a mammoth such as Aviva which, on 4th October, during a bout of ‘nerves’, was yielding a prospective 9.5%. That’s fantastic for any quality large-cap equity. Keep that for five years and, compounded, you have doubled your money in a highly liquid stock with a broad spread of assets and a ruthless, hatchet-wielding management – which, perversely, investors approve of. Instis and pension funds, with long-term liabilities to fund, buy stocks like Aviva for that very reason.
Conversely, there is no reason for an insti to buy GKP other than the spectacular upside. I am not being disingenuous by saying that – you can’t run a dividend-hungry pension fund on a wing and a prayer. Until the X-factors sort themselves out, the very big money cannot touch this stock.
Then there is the opportunity cost of holding a stock with no income while the Avivas and National Grids of the world are paying out regularly come rain or shine. That hurts. The only compensation is a massive pay day. Until that time comes, we are naturally twitchy.
It is a fact that 80% or thereabouts of investment returns come from dividends, not capital gains. Directors declare dividends to keep investors sweet. By contrast, what has Todd done specifically to keep small investors on side here? Nothing, I suggest. He has helped his City backers with placings. But I don’t get the impression that he feels in any way beholden to PIs.
CASH GENERATION & PERSONAL GOALS
These AIM stocks have one thing in common: they are all serial fundraisers. Look at CYAN and VIY, which are glaring examples among many. How else does a company exist for 10 years without making a cent of profit? I would steer clear. But we have raised all we require and that is a source of confidence.
Cash generation is the name of the game in markets. Oil in place stats do not pay the rent. The market will take notice when we start SELLING oil internationally AND GETTING PAID FOR IT, if indeed we get as far as that before the inevitable take-out. Add to all this uncertainty the monumental idleness, bureaucracy and corruption which is Iraq pre- and post Saddam and you have a very compelling case for instis to steer clear. Of course, they will pile in when the Iraqis come to their senses. At that point we PIs will reap massive rewards but the instis, while being late to the party as we see it, will have been scooping dividends elsewhere with the likes of Aviva. As PIs we have our own ‘dead money’ here with no-one except perhaps the wife to answer to, but an insti with targets and a fiduciary role with clients cannot tolerate that.
Thus I see a reason for things being the way they are. On a personal level, each of us has a timescale over which we are prepared to be invested. That is a factor which should be dictated by practicalities such as your age and how long you have until retirement, or other family commitments which might take priority such as mortgage redemption, property maintenance or school fees. Needs such as this would dictate being in fixed interest and dividend payers rather than AIM stocks. Risk profile and age are in inverse relation. I am no spring chicken but what keeps me here is the belief that the return will be substantial and far outstrip even the most generous dividends by end-2012. That is the time limit I have set for myself.
Personally I am happy that the banks which took massive risks buying Greek debt have been made to take responsibility for the losses with an agreed 50% write-down on that investment. That is only right in law and justice. The market can now rally as the immediate threat to the euro system has been averted. If the rally continues – Hub I hope and believe that you are right in thinking that it will – then some of the profit can seek higher-risk diversity in the likes of GKP. So I SEE ONLY UPSIDE FROM HERE, barring absolute Armageddon.
UNDERPERFORMANCE LOGICAL
Mikey, I disagree with your comment that the market does not like instability. It trades on instability and seeks entry points, as it did recently with some great divi payers. Yes, it is a nauseous roller-coaster and, for the reasons above, small caps get hit. Yet when the broad market recovers, we might get left behind, which is frustrating. But the same risk factors apply to us now as applied when the market was in free-fall, so the pattern is not without some logic.
But that should not trouble the long-termers and those PIs without immediate need for income from their investments. Whether in business or personal finances, cash is the lifeblood so I would only be invested here if I had other sources of income day to day which, fortunately, I do. None of us should be penny-pinching just because a bunch of half-witted Iraqi politicians cannot agree on how to run the country. I may be aggrieved about it, like most here, but, so far, it has not impacted my lifestyle and the day it starts to do that, I am out.
Mikey, we have to separate our personal needs from the company fundamentals. Most of us see nothing but upside for this stock yet the frustration is palpable. I conclude that the discontent being voiced on this BB is of an emotional nature and not GKP-related. It is good that the BB serves a useful function as a sounding board. But, as we know, there is no place for emotion in investing. We have excellent fundamental commentators here who have made a compelling case ad nauseam ((ăd nô'zē-əm)
adv.
To a disgusting or ridiculous degree; to the point of nausea.
), and I have bought into that. So stay focused on that, don’t keep marking your position to market and don’t get wound up by the vacuous politics.
==============
Gerstenlauer presenting at Oil Council e...
Gawain_1977
12
Hey all,
Worth checking out - noticed that John G. is speaking at an event I know of quite well, and it's not 'just another oil conference' but one specifically focused on M&A and other key financing activities for E&P companies.
John is actually delivering a keynote to the second day: "Unearthing new investment opportunities – the future of Iraq and Kurdistan", under a session that examines 'Frontier Pioneers: Striking it Rich by Investing in Exploration'. Among the other speakers are some EXCEPTIONAL banking and M&A experts (I know two of them very well) and it seems like a strong environment for networking and 'touting' the GKP story.
In my humble opinion, this is exactly the type of event we want to see GKP involved with because it networks the right level of people together who might be able to advise/get involved with GKPs eventual buyout.
It's being held at Chelsea FC (unfortunately!) so anyone London or SE based might find it a doddle to go along to. Unfortunately it costs a fair old whack to attend but this does at least ensure most (if not all) in the room will be senior oil & gas/ banking executives...
Link -
http://www.oilcouncil.com/event/weca/overview/
Good luck everyone - something is surely ALREADY being brewed by the M&A/Supers/NOCs executives with regards to GKP t/o - they'd have to have been living in a cave to not already be sizing up the golden opportunity they have to replace reserves on their balance sheets with one fell swoop.
==============
Sinopec, the Chinese state-owned oil producer and refiner, agreed to invest $5.2 billion in the Brazilian oil and gas assets of Galp Energia, the Portuguese resources group.
The investment would consist of a $4.8 billion cash injection, and a $390 million loan to the Portuguese parent company. The cash would be used to fund investment in the project. In return, Sinopec would get a 30 percent stake in the Brazilian assets.
Galp said the deal valued its Brazilian assets at $12.5 billion, not including the cash contribution. Based on its stated reserves of 2.9 billion barrels of oil equivalent, adjusted for the riskiness of retrieving them, that implied a value of $4.34 per barrel.
Sinopec bought a 40 percent stake in neighbouring fields owned by Repsol, the Spanish energy group, in October 2010. It paid $7.1 billion for the assets, which included 1.8 billion barrels of oil equivalent, including risked exploration.
No more Mr Moneybags
Sinopec's M&A strategy gets a little smarter
11 November 2011 | By John Foley
PrintEmailSave
Chinese oil major Sinopec is starting to show some M&A discipline. It has just invested $5.2 billion in the Brazilian oil fields of Galp Energia, the Portuguese oil company. Compared to its last big deal it did in the same back yard, the price looks positively reasonable. With luck, Sinopec might make a habit of powering its big acquisitions with logic as well as cash.
Sinopec and Galp look well matched: the buyer has near-limitless access to cheap bank lending. It has the unquantified, but very substantial, backing of the state too.
Galp, in contrast, looks strapped for cash. Capital expenditure for the year comfortably outweighs its projected EBITDA(earnings before interest, taxes, depreciation, and amortization) for this year, according to Reuters consensus estimates. Balance sheet strains may explain why Sinopec is helping to refinance a chunk of Galp’s debt with a $390 million loan.
Galp investors hoped for more, and its shares fell 11 percent as the deal broke. Based on the $12.5 billion at which Galp’s Brazilian assets are valued, Sinopec is paying $4.34 per barrel of oil equivalent for the project’s total risk-adjusted reserves. Last year, Sinopec paid around a fifth more per barrel for a 40 percent stake in a neighbouring project of Spanish energy giant Repsol. The difference in price neatly explains the $1.7 billion fall in Galp’s value as news of the deal broke on Nov. 11.
In reality, some differences in the qualities of the two Brazilian assets explain the differences in price. Galp’s fields are gassier than Repsol’s, which puts a dampener on the valuation. Moreover, the Galp stake is smaller, and comes with less operational influence. And Sinopec isn’t saying how much oil it can carry home from the venture – a perk that carries high value for state-owned producers from the world’s most energy-hungry nation.
Still, Sinopec, now on its third sizeable overseas deal since the beginning of October, does seem to be learning some tricks of the M&A trade. And it seems to appreciate that the key is not to overpay. The captive savings of 1.3 billion citizens are done no good being channeled into whimsically(Determined by, arising from, or marked by whim or caprice. See synonyms at arbitrary.
) priced acquisitions.
=================
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