“Dice are rolling, the knives are out … ”
In this week’s blog, we will highlight a new “shark in the water”—a company with solid balance sheets, long-term growth strategies, and cash to spend on acquisitions from stressed rivals during these stressful times.
Last week we discussed Shell, which we believe has both the firepower and hunger for acquisitions in Brunei, Malaysia, the offshore Nile delta in Egypt, the Norwegian Sea, and west of Shetland. We turn our attention this week to French supermajor Total, which we see as an apex predator, a great white among the sharks, likely eyeing Latin America, Africa, and possibly central Europe for opportunistic expansion. With the May 5 news that the Algerian authorities have rejected its takeover of Occidental’s Algerian assets, acquired via last year’s Anadarko purchase, Total may now have an even greater appetite than it already did. That appetite could grow further if its acquisition of Occidental’s Ghanaian assets, which was contingent on the Algerian deal completing, also falls through.
Total is a world leader in natural gas, with massive reserves and a significant stake in the global LNG business. Brazil is in the early stages of a massive gas supply transition, with Petrobras being stripped of its gas monopoly and pre-salt production continuing to come online. Gas use in Brazil’s energy mix is growing, though it lags many countries in the region. With the country committed to reducing its carbon footprint, we see natural gas gradually replacing coal on a large scale, along with renewables. The country’s gas pipeline and distribution networks remain relatively underdeveloped, but over the medium and long term that will change. New pipelines are already being built to move the huge quantities of pre-salt associated gas ashore (despite some of it having high levels of CO2) and, as a result, Bolivian gas imports have been significantly reduced in recent long-term contracts.
We expect Total to play a key role in the expansion of Brazil’s gas market as a producer—and possible exporter—over the long and medium term, so it will be on the hunt for assets across the value chain. Although the company recently canceled a drilling rig contract in Brazil, this seems less like a retreat and more like a temporary balance sheet move; we fully expect the company will continue to patiently await the right conditions. With less scrutiny and pressure on quarterly results than most companies, Total is well positioned to take on more oil assets in the country.
While we see no signs that Total wishes to expand aggressively in Argentina, we’d expect the firm to maintain its foothold, especially if the gas market remains profitable. Trinidad & Tobago, Guyana, and Suriname are also locations where Total could pick up additional assets.
Before the oil price plunge, Total was likely considering a piece of the action in Nicaragua’s Pacific offshore Sandino Basin, where Equinor operates nearly 16,000 square kilometers in Blocks C1, C2, C3, and C4. The Norwegian flagship explorer desperately needs a new partner for its planned Mango 1 exploration well following Cairn Energy’s withdrawal from the blocks, but Total’s exploration management may have a hard time convincing boardroom players and bean counting investors to deploy dry powder on the oily exploration play now.
In Africa, Total has been the biggest asset buyer since the last downturn, with more than $19 billion in completed and pending transactions over the last five years. The company has added interests in more than 300,000 square kilometers to its portfolio, notably in South Africa, Libya, and Kenya (Figures 3 and 4).
In late April, Total announced a deal to purchase all of Tullow’s Ugandan interests for up to $575 million. In Mozambique, Total has its hands full with the assets it acquired from Occidental, through its purchase of Anadarko, in Q3 2019. It now operates Rovuma Offshore Area 1, where plenty of work lies ahead on the LNG development project, with local reports suggesting that Total is currently maintaining a 2024 target for first gas. However, uncertainties associated with the coronavirus and a rising threat level of Islamist militant activity in the Cabo Delgado region may disrupt the LNG project. Given the amount of work and current risks, one might assume that Total would maintain, rather than grow, its strategic position here. We actually think the French supermajor has a large enough appetite to join in Mozambique’s 6th Licensing Round (whenever it actually goes ahead) in an effort to match Eni’s and Exxon’s exploration presence in the offshore Zambezi Delta region.
Total will focus on the next exploration phase in South Africa’s Outeniqua Basin after its play opening Brulpadda wet gas discovery in 2019. Already in possession of 140,000 net square kilometers offshore Namibia and along South Africa’s west and south coasts, Total’s future expansion in South Africa will likely be along the east coast. The company tipped its hand late last year by picking up Equinor’s 30% interest in the East Algoa block—Total’s first move east of Block 11B/12B. Our second bet for southern Africa growth is in the Orange Basin, where the firm’s Venus 1 new field wildcat is planned for summer 2020. With farm-in opportunities in the basin on both sides of the border, Total will try to build a dominant presence in the region if the well is a significant discovery.
In the Middle East, Total is still awaiting ratification of its 2018 awards in Oman’s Greater Barik area, focusing on gas development with operating partner Shell (75%). In March 2020, Total and non-operator PTTEP were also awarded the adjacent Block 12 for the development of non-associated gas. These exploration projects, along with Total’s partnership in Oman LNG, which already operates a plant in Qalhat and intends to build another to offer a bunkering service supplying LNG as fuel to marine vessels, have us thinking that Total’s plate here is full.
Lebanon might be a different story if Total is sufficiently encouraged by the recent results of its 16/1 new-field wildcat, the country’s first-ever offshore exploration well. Drilled in Block 4, the well was reported in the last week of April to have encountered traces of gas, confirming the presence of a hydrocarbon system, but no reservoir in the objective Tamar formation. A second exploratory well, now due to be drilled in 2021 on Block 9 to the south and quite near Israel’s Karish field, may hold greater promise due to its more proximal location to the Nile Delta, the source of the Tamar sands. With Lebanon in a financial crisis even before the coronavirus outbreak, local economic and political considerations will factor into any decisions to expand here. Total operates both existing blocks in Lebanon, limiting options for acquiring more acreage to the recently extended second offshore bid round, now scheduled to close June 1, 2020.
Having already given up most of its southeast Asia and Australia exploration acreage and trimmed the Singapore-based new ventures team, relocating the remnant to France, Total’s gaze in Australasia is, in our belief, quite narrowly fixed on Papua New Guinea. LNG is the play there and is firmly in line with the company’s global strategy. Given the regional cuts and the fact that Total’s last acquisition in the area was three years ago, we simply don’t see the region as the prey this shark prefers.
Lastly, with favorable fiscal terms and access to the attractive central Europe market, Total may try to expand its presence in Bulgaria (Figure 5). It holds the 1-21 Han Asparuh license there and seems prepared to persevere in spite of mixed drilling results to date—one technical success and two dry wells—that likely underlie rumors that Repsol will withdraw from the block. With a tender up for adjoining deepwater Block 1-26 Tervel, south of Han Asparuh and east of Shell-operated Han Kubrat, we’ll soon see whether Total has an appetite for further Bulgarian exploration.
If the company wishes to expand more broadly in the Black Sea, perhaps more likely targets are the upcoming (but serially delayed) Romania and seemingly more firm Ukraine tenders, with at least eight blocks between them. There was talk that Total was considering a bid for ExxonMobil’s 50% share in the Neptun Deep project in Romania, although now it seems that a joint bid from Romgaz, PGNiG, and OMV Petrom is favored. If Total views the Black Sea as geologically favorable to exploration and the central/eastern Europe market as more stable in the longer term, it may favor establishing an exploration position now rather than paying a premium for more proven resources later.
Here, at the end of each Sharks blog installment, we open it up to you. What do you think? Whom would you see as the predators if a feeding frenzy ensues? What have we missed or gotten wrong, in your opinion? Fancy a look at our just-released Q1 activity maps? Our team of 27 international scouts, boasting more than 400 combined years of experience, are willing and eager to engage with current—and future—customers on these topics and more!
Come back next week for our thoughts on supermajors ExxonMobil and Eni, before we turn our attention to the opportunistic large independent sharks.
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