Last week, Petroliam Nasional Bhd. (PNADF.OB), Malaysia's state-owned energy company, offered to buy MISC Bhd. in a deal worth about $2.8 billion. Petroliam Nasional, which is commonly referred to as Petronas, already owns 62.67 percent of MISC, a substantial liquefied natural gas ("LNG") shipper. While the business of shipping LNG is still quite small, it is anticipated that it will undergo substantial growth in the coming years.
The shipping business has had significant overcapacity for years, keeping cargo-box costs and margins low. LNG shipping is expected to have faster growth than many other types of shipping, with its demand fueled by reduced natural gas prices and the significant price disparity for natural gas in different geographic regions. MISC now operates one of the world's largest fleets of LNG ships.
Petronas offered to pay 5.30 ringgit per share in cash for the 37.33 percent of the world's second-largest liquefied natural gas shipper that it does not already own. MISC's market valuation halved over the last two years along with plummeting natural gas prices. The company was also in the midst of a dramatic change over the last few years, as it exited the container-ship business to focus on LNG tankers.
According to a statement by Petronas on the deal:
"The offer represents a significant step by Petronas to take MISC private and obtain full control of the company that will provide Petronas with greater flexibility in deciding MISC's strategic direction."
Petronas also stated that it "has no plans to dismiss or make redundant the employees of MISC as a direct consequence of the Offer."
Last year Canada initially denied a bid by Petronas for Progress Energy Resources, stating the deal did not provide a net benefit to Canada. Then late last year, Canada approved a higher offer of about $5.2 billion that it deemed provided a net benefit. Canada also simultaneously approved a larger deal by CNOOC (CEO), China's state-owned oil company, for Nexen Energy (NXY).
These Asian state-owned energy companies have recognized resistance by the governments of United States and Canada to the purchasing of substantial energy assets for foreign state owned energy companies. A U.S. company that is now in the process of selling assets is Chesapeake Energy (CHK), but it would be nearly impossible for the U.S. government to allow the likes of Petronas and/or CNOOC to acquire any of Chesapeake's domestic energy assets. This hurts the value of CHK's domestic energy production assets, and all others, by taking some of the most interested and capable buyers out of the market. Asian interests initially looked to Canada, but Canadian regulatory changes have grown more difficult.
Though Petronas already owned a majority of MISC, this takeover deal is somewhat surprising, given the apparent need to focus on the ongoing integration of Progress Energy. Still, this deal should be easy for Petronas to digest, and not alter its finances in a manner that would prevent Petronas from making further bids, even this year. Both deals are substantially in furtherance of LNG production and distribution, including an ongoing project involving Petronas and Progress to develop a pipeline and LNG terminal in British Columbia that would allow shipping of LNG to Asia.
Asian energy demand will certainly look everywhere it can for cheaper energy. Last year, when domestic prices hit a decade low in April of 2012 at $1.902 for a million British thermal units, natural gas prices in Asia remained four to seven times more expensive. Natural gas peaked in the United States at $13.69 in 2008, but that price is about 20 percent less than the current price in Japan.
Beyond North America, Australia will also compete for Asian natural gas demand. China and several other Asian nations rely on Australia for many natural resources, and Australia's resources are substantial. Other global suppliers will likely include Russia, which would not require shipping in order to distribute LNG to China, and could instead develop a more efficient pipeline system. A future Russian supplier to China could be OAO Rosneft, an integrated oil and gas company majority owned by the Russian government, and 20 percent owned by BP (BP).
LNG terminals are not so easy to find in the United States, and 2012's pipeline development derailment caused the market to look harder at alternatives. There is currently only one approved export terminal in the U.S., which is still under construction, though seven others are awaiting approval. The Department of Energy is not going to decide on any further approvals for LNG terminals until some analysis findings are published later this year, so there is a slight hold-up.
The only presently approved terminal is an 18 million metric ton facility in Sabine Pass, Louisiana, and being built by Cheniere Energy (NYSE: LNG). The facility is not yet prepared to ship natural gas, but shipments are scheduled to start in 2015 and the vast majority of the capacity is already contracted for, with large portions contracted to entities in countries both with and without free trade agreements. Other approved terminals would also likely quickly build large books of multi-year orders for much of their capacity.
Capitalizing on the exporting of North American natural requires a domestic transportation system that efficiently moves gas to port. The American midstream business is becoming dominated by publicly traded MLPs. The last several years of MLP growth were primarily predicated on natural gas infrastructure development, but a shift occurred to service increasing crude demand and prices.
MLPs have grown in popularity because many are designed to pay out high distributions to shareholders. The asset class is a newly adopted allocation for retail investors, as well as many institutions and pensions. Several new MLP ETFs, ETNs and funds came into existence in the past three years, with more to come. The strong fund flows stemming from the growing allocation into MLPs should continue to fuel MLP asset purchasing.
The asset class received validation through high profile deals in the last two years, like the Kinder Morgan (KMI) acquisition of El Paso Corporation (EP) for $38 billion and the Energy Transfer Equity LP (ETE) acquisition of Southern Union for $7.9 billion. These deals highlighted the versatility in using MLPs and growing industry preference for working under a MLP model. MLPs may begin to become more active acquirers of energy assets.
The next potential Canadian sellers of North American natural gas assets appear to include companies like Enerplus (ERF) and Pengrowth (PGH), where both hold North American energy assets. These companies were also both formerly Canadian Royalty Trusts, or Canroys, which were substantially similar to MLPs in the United States, but which Canada phased out a few years ago. In 2010, Korea's state owned energy company bought Harvest Energy Trust, another similar former Canroy. Similar deals seem possible, and the development of a Canadian LNG terminal to the Pacific will only increase the attractiveness of these assets to Asia.
Both Pengrowth and Enerplus have declined substantially over the last two years, much like MISC had. Most other equities with significant exposure to natural gas have also suffered due to that association. Pengrowth declined with natural gas last spring, and then fell when the company slashed its monthly dividend by about 43 percent, from 7 cents per share to 4 cents. At about the same time, Enerplus cut its monthly dividend by 50 percent, from 18 cents per share to 9 cents.
Last year, Pengrowth acquired NAL Energy Corporation in Q1 of 2012, adding more than 35 percent to PGH's production, and increasing the company's inventory of oil and liquids-rich drilling locations. Enerplus sold some assets last year in order to fund its capital expenditure costs in order to grow through developed production over acquired productions. The company's still undeveloped resources include significant shale assets in the United States. Declining natural gas prices caused the company to delay much of its intended natural gas production growth and instead accelerate oil and liquids production plans.
Acquiring Canadian energy companies will be more expensive in the future. When Canada approved the Nexen and Progress deals, Canada also indicated a more stringent future policy framework for the review of state-owned investments in Canada. The policy is an indication of the increased importance Canada is placing on retaining rights to its own resources, but it is also a message that there is an increase in the price that the Canadian government will require in order to deem any future bid for energy assets to be a net benefit to Canada. Moreover, this new Canadian scrutiny may make state-owned energy companies unlikely to acquire more Canadian companies whole, but they may obtain minor interests in several over time.
If natural gas continues to grow as a preferred global energy source, the businesses that are dedicated to its production and distribution should grow. While many natural gas companies, and especially those within the domestic U.S. exploration and production segment, performed exceptionally poorly in early 2012, it appears likely that many of these companies bottomed during the year, along with the underlying commodity itself.
Though natural gas prices may not substantially rebound in the near term, if ever, some price stability and/or appreciation should buoy the industry. Other potential industry catalysts in the near term include the potential eventual approval of supplemental U.S. LNG pipelines and terminals. The industry and these companies could benefit from increased global natural gas demand and further consolidation for years to come.