Total and Maersk Oil: a perfect match?

The multi-billion-dollar deal shows oil and gas M&A is back with a vengeance

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An oil company committed to building economies of scale and acquiring assets at the bottom of the market is buying a division operating in similar areas from a company that wants out of the oil business. Total's acquisition of Maersk Oil from AP Moller-Maersk looks like an ideal fit.

Total is buying the Danish firm's hydrocarbons unit in a $7.45bn deal, in which AP Moller-Maersk will receive $4.95bn in Total shares, while Total will take on $2.5bn of Maersk Oil debt. On top of the headline figures, down the line, Total will also be liable for Maersk's decommissioning obligations in the North Sea, which are around $3bn. Assuming the deal is approved, it is expected to close in the first quarter of 2018.

According to Total, the acquisition brings the French company additional 2P and 2C reserves of around 1bn barrels of oil equivalent—80% of this in the North Sea—and will add some 160,000 boe per day of production in 2018. Much of this is located in areas of the world where Total already has a strong presence or wants to bolster its profile.

Maersk Oil has a 49.99% stake in—and is operator of—the giant Culzean field in the North Sea, which could be meeting around 5% of UK gas demand by the early 2020s. It also has an 8.44% stake in Norway's offshore Johan Sverdrup project, operated by Statoil, based on one of the largest North Sea finds of recent years, with estimated resources of around 2bn-3bn boe.

The deal reinforces Total's position as one of the major players in the North Sea and should also fortify its position in other regions too, notably Algeria and Iran, where both firms have assets in the South Pars gas field.

Despite the juicy looking assets, there is no doubt that what risk there is lies on Total's side, while Maersk's parent can now make good on the intention of its chief executive, Søren Skou, to bail out of the oil and gas sector and focus on transport and logistics. These factors were perhaps responsible for a sharp jump in AP Moller-Maersk's share price immediately after the announcement of the deal, and a slight fall in Total's.

However even a transaction worth almost $7.5bn is not too much of a gamble for oil and gas major Total, which has a market capitalisation of well over $100bn and whose cost-cutting early in the industry's post-oil price crash down-cycle has left its balance sheet looking healthier than many of its rivals. Total says it was the only major company in the hunt to buy Maersk Oil.

The extent to which the acquisition pays off for the French company won't be clear for two or three years, when consolidation of staff and assets has progressed sufficiently. Total chief executive Patrick Pouyanné estimates consolidation of the two companies' operations could cut costs by more than $400m a year from 2020, with most savings coming from the North Sea region, where job losses are likely.

Total's capital expenditure forecast of some $15bn-17bn for 2018 remains unchanged, reflecting the company's bullish outlook.

The acquisition shows piqued interest in mergers and acquisitions among the industry's major players, which deem this the right time to pick up smaller players—or their assets —that have been buffeted for almost three years by the impact of low oil prices. ExxonMobil and BP are among those that have made sizeable asset acquisitions over the last year or so, headed by Exxon's purchase of fresh acreage in the US Permian basin for around $6bn. Total itself agreed to buy some $2bn of assets from Brazil's Petrobras last December.

For AP Moller-Maersk, the sale saves the company the headache of spinning off Maersk Oil via an initial public offering, which had tentatively been planned for next year, and must be regarded as something of a coup for Søren Skou, who has more or less severed the company's ties with upstream at one stroke—though it does retain exposure to the oil industry, given its 3.75% stake in Total, resulting from the deal, and, of course its fleet of oil products and LNG tankers.

Market observers will now be watching to see if Total's willingness to indulge in costly M&A activity will spur others to do the same.

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