The Commodity Investor: Big Oil Divesting Assets, Which Fuels Investor Returns

November 25, 2013

Major U.S. oil companies are selling international assets to focus on domestic production, which creates value and cost savings.

 

This year has seen a remarkable shift in the global energy matrix, as a quiet revolution is underway that will shape the industry landscape for years, if not decades, to come. However, many have failed to notice. That’s because events have taken place that seem disconnected from each other; but in reality, many of these events are not only interconnected, they’re often the direct consequence of a specific (seemingly unrelated) event.

As I’ve written about extensively in this column, the shale gas revolution in North America (mostly the United States, although it’s beginning to take hold in Canada as well) is having a major impact on the energy matrix worldwide. Thanks to technological innovation, companies are now able to extract oil and gas that were previously inaccessible, market them and sell them to consumers worldwide.

As a result, many U.S. companies have stopped their diversification programs in order to focus on the shale revolution happening back home. Instead of drilling and extracting hydrocarbons in faraway places, North American energy companies are actually selling their assets overseas and focusing on developing assets back home.

Chevron (NYSE:CVX) recently sold several of its major assets in Africa, including midstream and downstream operations in Kenya and Uganda, as well as exploration and production blocks in Nigeria (which it sold for close to $1 billion).

ConocoPhillips (NYSE:COP) has sold off one of its biggest overseas assets, located in Nigeria, for close to $2 billion. In addition, it has a divestment program in place that will produce assets in Algeria and Kazakhstan in a move that will generate close to $9 billion in proceeds.

And it’s not just the majors that are moving away from faraway geographies. Pioneer Natural Resources (NYSE:PXD), a nonmajor E&P company based in Texas, has recently sold off its assets in South Africa and Tunisia. Pioneer has also agreed to sell its assets in Alaska in excess of $500 million in order to focus on its presence in the Permian basin located in West Texas.

The company has a large presence there that may end up translating into oil reserves reaching 7 billion barrels. That is enough easy-to-access oil to make it economical to divest its assets overseas and only focus on domestic production, which also come with less geopolitical risks.

Consolidation Phase

As American and North American companies are divesting their assets overseas and retrenching back to the domestic market, it is opening up competition to other global oil companies (namely companies from Asia).

Indeed, the biggest buyers of oil assets so far this year in Africa were the Chinese, through CNOOC, PetroChina and other domestic Chinese companies. SINOPEC from China purchased close to $4 billion of production assets in Nigeria alone this year (including a 20 percent stake in Total’s (NYSE:TOT) offshore block for $2.5 billion.

All in all, the Chinese have spent close to $15 billion buying oil and gas assets worldwide this year. Expect this trend to continue well into 2015, as national oil companies from Asia seek to secure production assets around the globe.

 

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