Up to $35 billion in Chinese investor dollars in the oil industry have been slated for mergers and acquisitions, but this fact may work against the best interest of the country’s capital holders, according to a new report by Bloomberg.
A majority of the $160 billion in M&A in the oil sector over the past 20 years has proved to be disadvantageous to shareholders in China, analysts at Sanford C. Bernstein & Co. said.
Offshore producer CNOOC has spent $15 billion on just the 2013 Nexen purchase. CEFC China Energy invested in Russian state giant Rosneft at a $9 billion rate earlier this year.
“After a period of inactivity, we expect M&A activity to increase,” Bernstein analysts said in the report. “Unlike previous cycles, M&A will be more disciplined and hopefully more value orientated.”
At a $65 barrel, outbound mergers targeted at Europe and Africa have lost investors $23 billion in value, Bernstein says, which uses purchase price, remaining net-present value and free cash flow.
“Given fears of energy security, the perceived wisdom is that Chinese companies are buying resources to make up for the deficiency in domestic oil and gas reserves,” the analysts said. “As such, many investors see outbound M&A as a form of national service, which is largely wasteful.”
West Virginia’s shale gas business got a $83 billion investment from the world’s largest power company, China Energy, earlier this year.
Mergers in the domestic space are popular as well, but do not lead to a similar drain of capital resources. Earlier this year, China approved the merger between its biggest coal producer Shenhua Group Corp, and one of the top five state power companies, China Guodian Corp, in a deal that would create the world’s largest power company by installed capacity and with assets worth $271 billion. That company is now called China Energy.