Can Asian investors afford to ignore US tight oil?

Asia's upstream players have been notably absent from the Permania that has dominated M&A markets over the last 12 months — we believe this might be set to change.

Asia's oil and gas production will fall by 20% over the next decade and, with portfolios heavily weighted towards mature conventional assets, most of the region's top players are facing long-term declines.

Volumes from US unconventional plays will grow by 80% over the same period but, of the top 20 Asian companies, only CNOOC, Mitsui, KNOC and SINOCHEM have some exposure to L48 unconventional projects. Most deals were completed before 2013, with US independents needing growth capital to drill newly acquired acreage.

However, value creation from this joint-venture (JV) model didn't always match expectations. Many deals saw Asian buyers invest in acreage that subsequently become secondary to the operators whose focus quickly shifted to monetising the next 'hot play' in its portfolio. Shale gas cost carry deals also meant buyers paid more, but ultimately produced less, than anticipated.

Nevertheless, their relative financial strength and the need to grow output in the near-term could incentivise Asian investors to re-visit this M&A strategy. Very few pre-FID Asian projects can complete with the high volumes and low breakevens available on the tight oil cost curve.

Similarly, financially-stretched Lower 48 operators with ambitious growth plans may welcome capital investments from partners who share their long-term vision. We believe there is a window of opportunity to be exploited as tight oil cash flow remains strained and higher cost inflation threatens to further erode returns.

Taking the Permian basin as a case study, we have identified operators with near-term negative cash flows and large undrilled well inventory. These could represent viable opportunities for Asian (and other) investors in tight oil's hottest basin.

But, although Asian tight oil deals appear logical, hurdles remain. US regulatory challenges could deter sellers while the Trump administration could slow or politicise deals. The fast-moving Lower 48 market is also problematic for Asian companies who traditionally have long lead-times for decision-making.

While opportunities for exposure certainly exist, lessons from the past must be learned and a clear strategy for the future defined for Asia's return to US tight oil to be successful.

Read the report

In the full report, 'Making the case for Asian investment in US tight oil', we focus on the Permian basin, identifying operators with near-term negative cash flows and large undrilled well inventory. These represent viable opportunities for Asian (and other) investors in tight oil's hottest basin.