Hungarian fuels group MOL may soon be making a new acquisition, as the sale of German RWE’s oil and gas unit DEA to Russian billionaire Mikhail Fridman is increasingly likely to fall through. MOL, which has been in competition with several other companies to buy DEA, has said it would be interested in re-entering talks about DEA, should the deal with Fridman flop for lacking British approval. DEA would essentially fit into MOL’s portfolio, further reducing its risk profile, while shareholders would not necessarily be the happiest about a new takeover offering low return potential, writes portfolio.hu.
Britain blocks DEA purchase
RWE in March struck a deal to sell DEA for EUR 5.1 billion (USD 6.52 bn) to a Fridman-led group of investors, but the Financial Times on Thursday reported that Britain could block the transaction.
British Energy Secretary Ed Davey is “not minded” to sign the required letter of assurance in light of recent sanctions against Russia over the Ukraine crisis, the FT newspaper quoted a person familiar with matter as saying on Wednesday.
This clearly indicates the EU’s stance regarding Russia. Although the companies involved here do not belong directly to a close group of companies important for President Vladimir Putin that were directly hit by the western sanctions, the EU obviously makes no differentiation between the companies in this respect.
What could the blocked deal mean for MOL?
The report about Britain blocking DEA’s takeover is important for Hungary’s MOL too, as it has already been in race for RWE’s oil and gas unit.
“It is well known that we have always viewed DEA as a highly attractive asset, and that we are always open and approachable if someone from the industry wants to explore options,” a spokesman for MOL told Reuters on Thursday. We might just hear MOL announcing a new acquisition shortly.
RWE indicated a year ago that it wants to sell its division which would have required significant investments. Similarly to its sector peers RWE plans divestments to reduce losses stemming from the phasing out of nuclear power ordered by Angela Merkel’s government following the Fukushima disaster.
MOL Group, along with BASF’s oil and gas unit Wintershall, had also submitted binding bids for DEA, sources said at the time.
RWE declined to comment and Wintershall was not immediately available for comment.
DEA’s British assets are worth about EUR 1 bn, analysts said. They noted RWE might opt to carve out these assets and sell them separately at a later date if it does not obtain UK clearance.
“RWE could sell all DEA assets, bar UK, to LetterOne at a reduced price, and sell the marketable UK assets (including Breagh) separately to another investor, admittedly on an extended timetable,” Reuters cited analysts at RBC Capital Markets as writing.
RWE said on Thursday it was still planning to close the sale to LetterOne by the end of the year.
What should we know about DEA?
RWE’s oil and gas unit DEA is present in 14 countries and holds nearly 200 oil and gas exploration licences. The company’s hydrocarbon production was around 80,000 barrels per day last year, and it had over 700 million barrels of oil equivalent in reserves. DEA’s EBITDA (earnings before interest, taxes, depreciation and amortisation) totalled EUR 940 m last year.
These show that we’re not talking about a puny little company here. If MOL acquired DEA its group level hydrocarbon production would almost double. The transaction would bring about a serious increase in MOL’s consolidated profit too, as the aforementioned EUR 940 m EBITDA is about half of MOL’s 2013 EBITDA.
Can MOL afford this asset?
Active investment activity has a central role in MOL’s strategy for the following years, especially in the area of Exploration & Production, where the group estimates annual CAPEX to be over USD 1 bn (and it could spend as much as USD 2 bn a year over the following three years). A part of the planned CAPEX is likely to go for acquisitions.
Although MOL’s financial situation is stable, its gearing is low and financing capacity is robust, a transaction of this magnitude would be a big bite even for this group, considering that its total liquid sources amount to some EUR 3.8 bn.
The only way MOL would be able to carry out this acquisition through if it obtained major resources, i.e. several billion euros. Divesting assets could be the main means to this end. And as regards the volume, this funding gap could be plugged by selling an asset the size of INA, the Croatian subsidiary. We have made some estimates as to how much MOL’s share in INA could be worth and, in our view, this figure is around USD 2-3 billion.
Selling the Croatian subsidiary remains a viable option, as MOL has never given up this possibility, but the Russia-Ukraine conflict really makes this sale difficult. We see potential buyers only in Russia, but the EU would definitely not welcome Russian interest in the strategic industry of a member state.
In view of the above, the most likely outcome, in our view, is that MOL will aim to acquire DEA jointly with a company that had participated in the earlier tender (e.g. Wintershall).
In light of the valuation of the pending transaction, buying DEA would be a costly treat, for MOL would need to pay nearly USD/ boe 14 for DEA’s 2P (proven and probable) reserves. At the Dec 2013 North Sea acquisition it paid a similar price for 2P reserves, whereas OMV’s multi-billion dollar North Sea acquisition involved only USD/boe 8.3 payment. Comparison is not that simple, though, as it is made more difficult by the different hydrocarbon types and tax aspects.
Would it be beneficial for MOL shareholders?
DEA is present mostly on more mature markets, in lower risk regions hence the takeover could further reduce the risk profile of MOL’s Exploration & Production portfolio. Due to uncertainties over INA, this could indeed be useful, but lower risk also means lower return.
Currently, one of the biggest problems for MOL is that it lacks key catalysts, a growth story that could give the share price a permanent boost. Therefore, from the shareholders’ perspective, it would be desirable in the long run if the group could make acquisitions also in regions that offer higher yield potential. The most promising projects for MOL are currently in Kurdistan, a region where we should expect meaningful growth in the coming years, even though estimates for the potential geological stock and exploitable reserves have been considerably lowered this year.