French oil giant Total SA has agreed to acquire Danish conglomerate A.P. Moeller-Maersk A/S's oil unit for $4.95 billion, signaling a renewed appetite for deals in the global oil-and-gas industry.
The deal will help Total bolster its position among the world's largest oil companies, potentially boosting its earnings and cash flow and shoring up its ability to pay dividends.
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For Maersk, among the world's largest shipping companies, the deal streamlines the company as it grapples with historic downturns in both the shipping and oil industries.
The acquisition, announced by both companies Monday, is the latest sign of consolidation in the oil-and-gas industry, which only now appears to be stabilizing after a prolonged and painful downturn in petroleum prices. Total and other big oil companies say they have reduced their costs enough to generate cash at prices at current levels around $50 a barrel, giving them flexibility to grow with acquisitions.
In the U.S., where small shale-oil producers have proved remarkably resilient to low oil prices, the sector has experienced a flurry of deals. So far this year, deals in North America have totaled $73.2 billion, more than in all of 2016, according to data from Edinburgh-based consultancy Wood Mackenzie.
Activity has also picked up internationally, particularly in Europe. Though the number of European deals so far this year stands at roughly half the level of those completed in 2016, their value has reached $16.8 billion, compared with $5.3 billion in all of 2016, according to Wood Mackenzie.
Until Total's deal on Monday, many of the acquirers were private-equity firms and smaller players, eager to get a foothold major oil hubs like the North Sea.
Earlier this year, Shell sold its British North Sea assets to Chrysaor Holdings Ltd. in a deal worth up to $3.8 billion. Chrysaor is backed by Harbour Energy Ltd., an investment vehicle managed by Washington-based EIG Global Energy Partners. BP PLC has also sold pipeline infrastructure in the North Sea to petrochemicals company Ineos and, The Wall Street Journal has reported, is looking to sell other assets in the region.
Total's acquisition of Maersk Oil is one of the biggest oil-sector deals since Shell's roughly $50 billion acquisition of BG Group last year. Many of the biggest oil companies have so far focused instead on piecemeal asset acquisitions and divestments.
Total flagged last month that it was on the prowl for new acquisitions, after striking a confident tone in its second-quarter results.
Total will pay for the deal with $4.95 billion in shares, while also taking on $2.5 billion in Maersk oil debt. Total will also assume nearly $3 billion in expected costs for decommissioning oil rigs in the North Sea.
Maersk Oil's assets will bolster Total's production by 160,000 barrels a day of oil equivalent in 2018 and add significantly to the French company's portfolio of oil-and-gas reserves, an important signal of growth for investors.
Total's shares fell modestly on Monday morning, with stocks trading down about 0.2%. Maersk shares were up around 3.4%.
"We imagine the investors won't be overly enthused with the idea of buying more oil barrels when they are overly concerned with falling oil demand," Bernstein said Monday in a note that praised the deal for adding potentially profitable barrels.
The deal is a vote of confidence in the North Sea, where around 80% of Maersk's reserves are located. The region has been a major oil-and-gas hub for decades but has also been plagued by high costs, aging infrastructure and declining production.
A number of sizable new North Sea projects is generating renewed excitement. Total said the production it is buying from Maersk can generate free cash flow at less than $30 a barrel.
Total will be northwest Europe's second-largest offshore operator once the deal closes, expected to be in the first quarter of 2018. The deal has been approved by both companies' boards but remains subject to shareholder votes and regulatory approvals.
Total said it would make Denmark its new operating hub for Total's combined operations in Denmark, Norway and the Netherlands.
Total said the deal should give it enough cash flow benefits to consider removing the discount it gives investors to take dividends in shares rather than cash. Known as a scrip dividend, paying investors in shares has allowed Total to preserve cash but has also diluted its share pool and weighed on its value.
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(END) Dow Jones Newswires
August 21, 2017 07:42 ET (11:42 GMT)