PetroChina Readies Coffers for M&A Frenzy; U.S. Oil Holds Back

PetroChina has the financial stomach that few other oil companies share. And it’s exploiting the heck out it, while most Western oil companies sit on the sidelines. By the time Western oil companies feel comfortable enough to follow in its footsteps, they’ll be left with the merger-and-acquisition scraps.

China’s biggest oil company said Tuesday that it views the current low oil prices and global economic downturn as an opportunity to expand its overseas reach through mergers and acquisitions. This really isn’t new information — the company has already completed a number of strategic deals in the past few months — but is noteworthy because it comes straight from PetroChina President Zhou Jiping.

Zhou’s comments were in conjunction with PetroChina’s annual general meeting, where the company announced plans to raise 100 billion yuan ($14.71 billion) through debt financing in 2009 to fund major strategic projects and overseas expansion this year.

Zhou said the company will expand its presence in five major regions where it already has business and will focus on strengthening cooperation with national oil companies in resource countries including Kazakhstan, Venezuela and Qatar. He said PetroChina also will work to expand relationships with international oil majors including Exxon, Shell, Chevron and BP.

Protectionist concerns have kept China from outright acquisitions. For example, concern among U.S. lawmakers killed Cnooc’s attempt in 2005 to buy Unocal of California. Chinese companies have since changed their strategy by working with state-owned banks in oil-for-loans deals.

China Development Bank has provided the overseas acquisitions reach that other companies can’t through its Chinese debt markets. As WSJ noted last month, China’s state ownership of its banks and oil companies lets it secure resources in exchange for money that foreign government can invest in their own priorities.

A few 2009 deals involving PetroChina and its parent company China National Petroleum Corp (CNPC) as well as China Petroleum and Chemical Corp., known as Sinopec:

• CNPC bought Kazakh oil producer Mangistaumunaigasin partnership with Kazakhstan’s state-owned KazMunaiGasfor $3.3 billion. A 100,000 barrel-a-day China-Kazakhstan crude oil pipeline will be operational by fall, PetroChina Chairman Jiang Jiemin said.
• CNPC and China Development Bank signed loans-for-oil deal with Russia’s state-owned oil producer Rosneft and national oil pipeline operator Transneft in February. Rosneft and Transneft will receive 20-year loans of $15 billion and $10 billion respectively in exchange for a supply of 300,000 barrels a day of crude for 20 years.
• Brazil’s state-controlled oil company Petrobras agrees to sell up to 100,000 barrels of oil a day to Sinopec in exchange for a $10 billion loan from China Development Bank.
• CNPC offers to buy Canadian company Verenex Energy for $443 million in an effort to snag a stake in Libyan oil fields. The company said recently it will proceed with the deal because the Libyan National Oil hasn’t followed through with its intent to exercise its prior right to buy.

In the meantime, U.S. oil companies with money in the bank are sitting on their hands. Some oil producers, as noted by Bloomberg, have cited unrealistically high price expectations from potential sellers for the slowdown in acquisitions. Others say acquisitions will rise once hedging contracts taken on by companies to protect against falling oil prices expire later this year.

There has been some acquisition activity within the ethanol industry as companies take advantage of bankruptcies and falling prices.

But even Exxon, which is flush with cash, is choosing to use its funds on capital projects, dividends and stock buybacks, according to David Rosenthal, vice president of investor relations during a April 30 conference call with investors.

China will continue to face protectionist concerns. But it hasn’t stopped the country yet. Chines oil and mining companies have already made $23.2 billion in acquisitions this year. Expect the deals to increase, through its oil-for-loans strategy, by partnering with super majors and by direct acquisitions of smaller companies that may fall under the protectionist radar.