brazil oil & gas. m&a update. spring 2013. norgestion mergers alliance
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Brazil Oil & GasM&A update
Spring 2013
Brazil is on the verge of an energyboom. Recent major oil & gasdiscoveries in offshore deepwater‘pre-salt’ fields will move thecountry into the top five producersglobally by 2020.
The resumption of explorationauctions in 2013 will boost M&Aactivity as international corporatesacross the supply chain positionthemselves to benefit from theassociated investment.
Key findings from our research:
State-owned Petrobras is investingUS$225 billion in energy projects tomeet its goal of doubling oil productionby 2020. Local industry will be a majorbeneficiary of this investment due togovernment regulation regarding localcontent (see page 5). However,Petrobras also needs the expertise ofinternational corporates. This is creatinghigh value opportunities for foreigncorporates across the supply chain.
Three new auction rounds will takeplace during 2013 covering 289exploration blocks, pre-salt and shalegas. They will be a catalyst for M&Aand new investment as local andinternational companies look toadd reserves and suppliers positionthemselves to win a share ofthe spend.
Some international companies in thesupply chain have established a localpresence. However, many are usingjoint ventures and acquisitions ofdomestic businesses to ensure theymeet local supplier content and gainthe approvals necessary to supplyto Petrobras.
Key major oil & gasfrontier for
internationalcorporates
“Brazil is transforming itselfinto one of the world’s mostimportant oil & gasproducers. We are seeinglarge and smaller foreigncorporations across thesupply chain using differentM&A strategies to enterthe market.”Leonardo Antunes, Managing Director, BroadSpan
Companies targeting US$400 billionopportunity
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A major offshore oiland gas frontierBrazil is now the ninth largest oilproducing country, accounting foraround 25% of global output. Onethird of global reserves discovered inthe last five years were found in Brazil,including the major find in the offshoredeepwater “pre-salt” layers off theSouth East coast. By 2020, Brazil isaiming to be a top five global oilproducer.
The country has been self sufficient in oilsince 2006. Estimates that the pre-saltfields hold reserves of 20 billion barrels isleading to export forecasts of around1.5 million barrels of oil per day (bbl/d) by2020. This compares to 8.5 million bbl/dcurrently exported by Saudi Arabia.
Petrobras dominates energy production
State-backed Petrobras accounts foraround 90% of Brazil’s total oil & gasproduction. It benefits from regulatoryadvantages over other competitors.For example, the production sharingcontract regime (PSC) establishedunder the 2010 Pre-Salt Law requiresPetrobras to be the operator on allpre-salt oil fields and to hold a 30%stake in other non-exclusive fields.
Independent Brazilian oil & gascompanies including Cosan, QueirozGalvão and OGX are becomingestablished players.
Global oil & gas majors are committedto Brazil with around 40 internationalcompanies active in Brazil’s upstreammarket (see Figure 1).
US major Chevron holds workinginterests ranging from 30% to 52% infields with average daily production of71,000 barrels of crude oil and 28million cubic feet of natural gas.Chevron’s largest investment in Brazil isthe development of its 37.5% interest inthe subsea Papa-Terra field, located inthe key Campos Basin. Planned totaldaily capacity of 140,000 barrels ofcrude oil is expected in 2013 viaproduction using floating production,storage and offloading (FPSO) facilities.
BG, the largest UK investor in Brazil,has invested over US$5 billion since themid 1990s. It plans to invest a furtherUS$30 billion over the next decade.BG is a partner in four offshore blocksalongside Petrobas, Repsol, SinopecBrasil and Petrogal, with estimated totalreserves of six billion barrels of oilequivalent. BG has a majorityshareholding in Comgás, Brazil’s largestnatural gas distributor, and a stake inthe gas pipeline which runs betweenBrazil and Bolivia.
Hess
Gazprom
Statoil
ExxonMobil
Eni
Shell
Petrobras
BP
Total
Chevron
Others
0 5 10 15 20 25 30 35
Floating liquefied natural gas
Floating production, storage and offloading
Semi-submersible platform
SPAR platform
Tension leg platform
Others
Note: Includes offshore projects in conceptualphase, FEED, under bidding or under construction
BG
Number of projects
Figure 1: Petrobras and selected global oil majors offshore projects
Source: Petrobras 2012, BG
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Global majors aremaking a long-term
commitment to Brazil
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China is becoming a significant player.In 2009, China extended aUS$10 billion credit line to Petrobras todevelop offshore oil. Terms included anincrease in oil exports to China. Sinopecis now one of the sector’s largestinvestors. Both Sinopec and Sinochemare growing their market share viaacquisitions of assets in oil fields(see page 6).
The Round 11 Auctions to be held inMay 2013 (which will include 289exploration blocks) and Pre-Salt andShale Gas bidding rounds later in theyear will increase the penetration offoreign majors and boost M&A. Thestrategies used to participate in biddingwill be affected by the different rulesgoverning each auction (concessionagreements, production sharingcontracts and the dominance ofPetrobras as the operator of all pre-saltblocks for example). Different rules willalso affect how the unitization processis conducted and therefore the valueof individual blocks.
Petrobras leading a massiveinvestment programme
Petrobras has the highest productiongrowth rate amongst the oil producersoperating in Brazil. To achieve this, itscurrent five year business plan is built
around a US$225 billion investmentplan which includes US$127.5 billion inthe exploration and production (E&P)sector (see Figure 2). This investmentwill enable Petrobras to double itsoil production for both domesticconsumption and exports to overfour million barrels per day by 2020.
Local producers and the global majorsare also making significant investmentsto develop E&P in strategicallyimportant oil fields. Total investment inBrazil’s E&P sub-sector is forecast toreach US$400 billion (includingPetrobras’ expenditure) by 2020.
The global outlook
Increasing demand for energyIn line with the increase in global economic growthestimates for 2013, forecasts for oil and gas consumptionare positive, mainly due to Chinese import demand. BP isforecasting oil consumption will grow by 1.6% a year,leading to 36% growth between 2011 and 2030. Morethan 90% of the growth is forecast to come fromnon-OECD countries.
High oil price supporting deepwater drillingThe stable high oil price has underpinned investment indeepwater drilling technology and made difficult recoveryenvironments economic. This has led to a significant shiftin the outlook for new reserves and the recovery potentialof previously difficult hydrocarbons – tight oil, shaleoil & gas and oil sands.
The world proven oil reserves total approximately 1,383 billion barrels of oil equivalent (BOE).The Middle East represents almost 54% of the total.
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New auctions willboost activity by
global majors
40
20
60
120
80
100
140
0
E&P
Refini
ng
Gas&
ener
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Petro
chem
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Distrib
ution
Biofue
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Corpor
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US
$b
illio
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70.6
13.23.8 3.1 4.1 2.4
127.5
Upstream
US$97.2 billion downstream
Figure 2: US$224.7 billioninvestment by Petrobras
Source: Petrobras
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Brazil Oil & Gas M&A update
Mid-marketcompanies usingtier 1 suppliers to
enter market
Long-termopportunities acrossthe supply chainA significant amount of infrastructureinvestment is needed to exploit Brazil’sdeepwater oil and gas reserves. Strict localcontent rules mean Brazilian companies areplaying a major role across the supply chain(see page 5). However, limited localexpertise and capacity means productiontargets will not be met without theparticipation and technical expertiseof foreign operators.
Areas where Petrobras has highlightedit needs the expertise of foreigncorporates include:
Upstream opportunities related to E&Pincluding testing and drilling equipment,oil platforms and drilling components,installation of exploration equipmentand equipment maintenance.
Downstream opportunities include oil &gas transport, refinery, petrochemistryand maintenance/monitoring equipment.
Mid-market also seizing opportunities
For some mid-sized component and servicesuppliers, the most effective approach toenter the market is via first tier suppliers.Large Brazilian and international companieslike GE, Aker and Cameron are providingsupply chain opportunities. Petrobras wantsto develop standardization in manycomponents and so supply contracts toboth Petrobras and tier 1 suppliers canbe substantial (see Spotlight below).
“Our customers are movingmore and more of theirproduction to Brazil and itis crucial to ensure that wehave manufacturing closeto their units.”Lennart Johansson, President Trelleborg EngineeredSystems, commenting on the acquisition of a subsidiaryof Veyance Technologies Inc
Source: Trelleborg press release
Opportunity Lead supplier Support supplier
Offshore oil drilling facilities needconstant supplies during and afterconstruction
Petrobras estimates it will need 235support vessels by 2020
Brazil’s Wilson Sons providesservices within shipbuilding andshipping. It has a service contractwith Petrobras to transport supplies
Netherlands-based Damen Shipyardsis building new tugs (in Brazil) andproviding offshore supply vessels(OSV) to Wilson Sons. OSV enginesinclude Caterpillar generator sets thatpower Rolls Royce azimuth thrusters
Equipment which goes on the seabed and enables production
Petrobras is constructing 48 drillingrigs and 38 oil production platforms
GE’s oil and gas business will supplyPetrobras with 380 subsea wellheadsystems valued at US$1.1 billion.Over 75% of parts will be made inBrazil
In 2012 UK subsea engineeringspecialist Viper Subsea won an orderwith Petrobras through a first tiersupplier to supply underwatercomponents
Offshore drilling vessels
Petrobas needs over 30 new drillingvessels
Singapore’s Sembcorp Marine’swholly-owned Brazilian shipyardEstaleiro Jurong Aracruz secured aUS$793 million contract fromGuarapari Drilling BV, Netherlands, asubsidiary of Sete Brasil Participacões
Austria-based Palfinger Dreggen hasa US$121 million contract to supplycranes to the Jurong Shipyard
Spotlight: selected opportunities in the subsea E&P supply chain
Source: Mergers Alliance, company press releases
Servicing
Well construction
Drilling vessels
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Brazil Oil & Gas M&A update
Market entrystrategies influencedby local protectionmeasuresGovernment regulation influencesthe strategic options available tointernational companies targeting thesector. Most are entering the supplychain via joint ventures with, oracquisitions of, mid-sized domesticcompanies which ensure they canparticipate in Petrobras tenders andmeet Brazil’s local content policy.
Petrobras approved suppliers’ register
Companies awarded contracts andorders directly from Petrobras arechosen from the company’s SupplierApproval Register. Registration can behighly bureaucratic and slow andforeign companies are required to havea legal representative in Brazil to fulfilllegal and financial requirements.
Acquisitions and joint ventures areoften the easiest way to enter theregister. There are over 5,500companies on Petrobras’ supplierregister so significant M&Aopportunities exist.
For example, US well completion specialistFTS International entered a joint venturein 2012 with privately-owned BrazilianE&P PETRA Energia, which will providewell completion products and servicesfor onshore conventional andunconventional oil and gas wells in Brazil.
Local content regulations
Legislation enforced by penalties requiresgoods and services used in the oil &gas industry have a significant levelof “local content”.
Joint ventures enable internationalcompanies to ensure that they meetregulations while often increasing thecompetitiveness of their locally-basedpartner with regard to price, deliveryschedule and quality requirements. Forexample, French oil service companyTechnip and Brazilian services providerOdebrecht agreed a joint venture whichwon a five-year contract estimated toworth US$1 billion to supply twopipeline installation ships to Petrobras.
Some companies are using acquisitionsto accelerate their entry into the sector.For example, UK-based Hydrasunacquired Remaq Ltda, a Brazil-basedprovider of flexible hose assemblies,in 2011 (see case study below).
Market entry case study: Hydrasun, UK-based provider of fluid control equipment
The strategic importance of BrazilHydrasun was attracted to the scale of investment beingmade to access deepwater reserves. Customer feedbackconfirmed that demand from subsea operators and drillequipment manufacturers for Hydrasun’s productswould be high.
Acquisition used to gain entryHydrasun decided that an acquisition would fast-trackits entry into Brazil and acquired Remaq, a local providerof flexible hose assemblies, in 2011. Remaq had acomplementary business model and a proven recordwith Petrobras, ensuring Hydrasun would meet local
content regulations and avoid Petrobras’ supplierapproval process.
Local acquisition enhanced value to acquirersEquistone Partners led a management buy-out ofHydrasun in 2007 which valued the business at aroundUS$115 million. Revenue has grown from US$75 millionin 2008 to US$157 million for financial year 2013.
The Investcorp Gulf Opportunity Fund acquired acontrolling stake in Hydrasun in February 2013 attractedby its presence in high growth markets including Braziland the Gulf Coast.
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M&A and jointventures enable
corporates to meetstrict Brazilian
regulation
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Brazil Oil & Gas M&A update
New auctions willdrive M&AThe size of the potential deepwateroil & gas reserves and the level ofinvestment by Petrobras and the globalmajors has driven M&A over the lastfive years.
The number of deals has fallen from apeak of 24 in 2010, a record year, to 15in 2012 (see figure 3). The fall was dueto uncertainty regarding the timing andterms of new exploration auctions, andconcerns about the scale of capitalexpenditure being undertaken byPetrobras and its impact on thecompany’s cashflow. However, the 2013bidding rounds will act as a catalyst forpartnerships and M&A as the majorsand leading suppliers look to expandtheir operations.
Inbound M&A is being driven by threemain types of international acquirers.
National oil companies
China has been one of the most activeacquirers. In 2011, Sinopec acquired a30% stake in the Brazilian assets ofGalp Energia, the Portuguese energycompany, for US$5.2 billion. Chemicalscompany Sinochem acquired a stakein the Peregrino Oil Field from Statoilin 2010.
Global majors and equipment providers
Oil majors are using acquisitionsto grow reserves. Maersk Oil’sUS$2.4 billion acquisition of SK doBrasil, owned by South Korea’s SKEnergy, gave the oil producer accessto three offshore oil blocks.
Trelleborg acquired a Braziliansubsidiary of Veyance TechnologiesInc which produces hoses for surfaceand deepwater applications in Brazil in2011 for US$6.3 million.
Tuscany International Drilling’sacquisition of Drillfor for US$62 millionin 2011 quadrupled the company’sBrazilian fleet, giving a 15% to 20%market share in the offshore drillingmarket. Contracts with Petrobrasand Petrogal were part of the saleconditions.
Private equity
Private Equity (PE) is increasing itsparticipation in projects. Both domesticenergy-focused and generalist fundsare investing. In 2011, BTG Pactualannounced a partnership withBrasbunker, a holding company thatcontrols companies in bunker transport,support for offshore platforms.
International PE is active and competingfor specialist operators. Singapore’sTemasek acquired a 14.3% stake in theoil services unit of Brazilian Odebrechtfor US$400 million.
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Corporates will useM&A to meet
demands of newdeepwater projects
Domestic andinternational privateequity active in the
sector
5
10
25
15
20
30
0
Num
ber
of
dea
ls
201020092008 2011 2012
Marine Ports and ServicesEquipment and ServicesDrillingStorage and TransportationRefining and MarketingExploration and Production
Last auction round Record year for M&ALess activity by IOCsawaiting new auctionopportunities
6
6
4
2
4
9
22
16
11141
7
4
22
12
7
11
Figure 3: M&A in Brazil's Oil & Gas sector since 2010
Source: Capital IQ, Mergers Alliance
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Brazil Oil & Gas M&A update
Feb-13 Georadar LevantamentosGeofisicos
Brazil Oil & Gas Equipmentand Services
Modal Administradorade Recursos
Brazil 50.4 Private equity
Feb-13 Hydrasun UK Oil & Gas Equipmentand Services
The Investcorp GulfOpportunity Fund
Bahrain NA Private equity
Dec-12 Alvorada Petroleo Brazil Oil & Gas Explorationand Production
Fortress Energy Canada 37.0 Inbound
Aug-12 Sete Brasil Brazil Oil & Gas Explorationand Production
Petrobras andBTG Pactual
Brazil 2,709.9 Domestic,Private equity
May-12 WFS Sondagem Brazil Oil & Gas equipmentand services
ForacoInternational
France 19.8 Inbound
May-12 Prooceano Brazil Environmental Servicesfor Oil and Gas
Collecte France NA Inbound
Mar-12 Shell, BM-S-45 ExplorationBlock in the Santos Basin
Brazil Exploration Block Petrobras Brazil NA Domestic
Feb-12 Petrogal Brazil Brazil Oil & Gas Explorationand Production
Sinopec China 4,800.0 Inbound
Dec-11 Raízen, Aviation Fuel Assets Brazil Oil & Gas Storageand Transportation
BP UK 100.0 Inbound
Dec-11 Alvorada Petroleo Brazil Oil & Gas Explorationand Production
Fortress Energy Canada 37.7 Inbound
Oct-11 Repsol Gas Brasil Brazil Oil & Gas Refiningand Marketing
UltraparParticipacoes
Brazil 27.5 Domestic
Sep-11 Shell, Block BS-4 inSantos Basin
Brazil Exploration Block Barra Energia Brazil 52.5 Domestic
Sep-11 Tropical BioEnergia Brazil Oil & Gas Refiningand Marketing
BP UK 59.8 Inbound
Jul-11 SK do Brasil Brazil Oil & Gas Explorationand Production
Mærsk Denmark 2,400.0 Inbound
May-11 Drillfor Brasil Brazil Oil and Gas Explorationand Production
TuscanyInternational
Canada 52.0 Inbound
Apr-11 Veyance Technologies, PlantLocated in Santana de Parnaiba
Brazil Oil & Gas equipmentproduction Plant
Trelleborg Sweden 6.3 Inbound
Apr-11 Statoil, Peregrino Oil FieldIn Brazil
Brazil Oil Field SinochemGroup
China 3,070.0 Inbound
Dec-10 Agua Grande Exploracao eProducao de Petroleo
Brazil Oil & Gas Explorationand Production
BrookwaterVentures
Canada 4.3 Inbound
Oct-10 Odebrecht Óleo e Gás Brazil Oil & Gas Explorationand Production
Temasek Singapore 400.0 Private equity
Oct-10 Repsol Brazil Oil & Gas Explorationand Production
Sinopec China 7,175.3 Inbound
Sep-10 Brasbunker Brazil Oil & Gas Services BTG Pactual Brazil NA Private equity
Apr-10 Starfish Oil & Gas SA Brazil Oil & Gas Explorationand Production
Sonangol Angola NA Inbound
Mar-10 Delba Maritima Navegacao Brazil Oil & Gas equipmentand services
BOURBON France NA Inbound
Jan-10 CNEC Engenharia Brazil Engineering and projectmanagement services
WorleyParsons Australia 96.5 Inbound
Date Target company Country Target Activities Acquirer Country Deal value(US$ mm)
Deal Type
Figure 4: Selected M&A transactions
Source: Mergers Alliance, Captial IQ
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ContactsSpecialist advice on call…For information on the oil & gas sector trends
Keith PickeringPartner, United Kingdom
Telephone: +44 115 957 8230Email: [email protected]
Peter GrayManaging Director, United States
Telephone: +1 914 263 9428Email: [email protected]
Nick Van Den BrulPartner, Russia
Telephone: +7 495 721 1370Email: [email protected]
Piotr OlejniczakDirector, Poland
Telephone: +48 22 236 9200Email: [email protected]
Robert JenkinsPartner, Russia
Telephone: +7 495 721 1370Email: [email protected]
Michel DegryckPartner, France
Telephone: +33 148 246 300Email: [email protected]
Piero ManaresiPartner, Italy
Telephone: +39 051 59 47 309Email: [email protected]
Jonathan FisherDirector, South Africa
Telephone: +27 11 268 6231Email: [email protected]
Jose Antonio MoranchelDirector, Mexico
Telephone: +52 55 2167 1810Email: [email protected]
Geoffrey MorphyManaging Director, United States
Telephone: +1 416 496 3075Email: [email protected]
Owen HultmanExecutive V.P, Japan
Telephone: + 81 3 6895 5521Email: [email protected]
Omkar BiradarVice President, India
Telephone: +91 22 61496666Email: [email protected]
Nigel JonesManaging Director, Singapore
Telephone: +65 6884 8880Email: [email protected]
Leonardo AntunesManaging Director, Brazil
Telephone: +55 21 2543 5409Email: [email protected]
With an oil & gas sector team, the Mergers Alliance partners are expertlyplaced to offer advice.
In particular, we offer:
Advice on structuring and completing deals in the oil & gas market.
Identifying acquisition opportunities around the world.
Information on sector trends and valuations.
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