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Return of Asian investment in US tight oil

May 9, 2017

Between 2010-13, Asian investors poured over US$20 billion into Lower 48 assets, mostly in shale plays. But since 2014, deal flow has dried up and involvement in the world's hottest tight oil plays, particularly the Permian, has been negligible.

Wood Mackenzie expects this to change, particularly if Asia's largest upstream players wish to diversify and grow production.

"Asia's top 20 upstream companies are heavily invested in conventional plays across the region, where fields are mature and production is set to decline 20% over the next decade," said Adrian Pooh, senior research analyst, Asia upstream. "On the other hand, output from the tight oil-driven US unconventional plays will grow exponentially over the same period, but their overall portfolio exposur "Asia's top 20 upstream c

ompanies are heavily invested in conventional plays across the region, where fields are mature and production is set to decline 20% over the next decade," said Adrian Pooh, senior research analyst, Asia upstream. "On the other hand, output from the tight oil-driven US unconventional plays will grow exponentially over the same period, but their overall portfolio exposure to the theme is under 1%."

In addition, many Asian investors come from positions of financial strength, with healthier cash flows and lower leverage and gearing than many international and US oil companies.

"There is a window of opportunity for outside investment into plays such as the Permian. The key is identifying the many financially-stretched tight oil operators looking for capital injections to help realise ambitious growth plans," Pooh said.

Rising cost inflation in tight oil will further erode margins and increase funding pressures. And if the oil price weakens, more opportunities will arise as struggling players turn to asset sales to free up capital.

But although the logic is sound, there are also reasons why many Asian players remain reluctant to get involved in such a hot M&A environment. The fast-moving tight oil marketplace is particularly challenging for larger Asian companies who traditionally have long lead-times for decision-making.

And while they were active buyers in shale plays during 2010-13, most of these deals failed to generate expected levels of value and returns. For some, bad memories will inhibit a return to US unconventionals.

"While there is room for more US exposure, there also needs to be a clear strategy to navigate through the risks and challenges," Pooh added.

Deal clauses have to be carefully evaluated to avoid value dilution of assets while partnering with the right operator is needed to ensure longevity of the project and a sustainable relationship. 



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