Hopes for more consolidation in global energy sector and Turkey postponed

Mehmet Öğütçü and Murat Çolakoğlu

After Shell’s $70 billion acquisition of BG Group - the biggest transaction in energy since December 1998, when Exxon bought Mobil for $80 billion - we all expected a flurry of mergers and acquisitions to take place in the energy industry, but so far few deals have been announced. 

Energy sector consolidation will no doubt come sooner or later both globally and in Turkey given the strong need we see in consolidating current assets, correcting balance sheets, and injecting fresh capital into the distressed companies and projects under consideration. 

The changing macro environment made the landmark Shell-BG deal, apart from being a very good fit and a logical deal, a very compelling one from a financial perspective as well. It came at a time when oil prices had entered a protracted period of weakness, with Brent crude trading about 50 percent below its peak in June 2014.

From Turkey’s vantage point, the energy sector consolidation is already underway but in limited scope.  

There will be bigger deals to come once the confidence of international investors has been restored. The market capitalization of the Turkish energy groups is small. Put together, all Turkey’s energy companies do not even equal the market value of Malaysia’s Petronas. It is absolutely essential for Turkey to create its own world-class energy companies to compete in world markets and invest domestically to the tune of $12 billion each year.

The current weak global macro environment, low energy prices, the shortage of capital, and the availability of attractive distressed assets, provide an opportunity for Turkey and its companies to expand their equity oil and gas investments abroad. Engaging in acquisitions is always preferable to organic international growth, particularly in the present environment.
 
The current picture in Turkey’s energy deals
 
According to PwC Turkey, there were 40 deals in 2014, on par with 2013 in terms of deal numbers. But it was a much slower year in deal value: $5.6 billion compared to $7.1 billion in 2013. The deals became smaller in size, averaging $140 million compared to $176 million in 2013.

Utilities retained their lead in the deals landscape last year, with 34 deals amounting to $5.5bn. The privatization of six thermal coal power plants and the associated mines made up most of the total utilities deal value. 

With vertical integration in mind, IC ICTAS Holding, which holds electricity distribution and supply licenses in Turkey’s Thrace region, offered $2.7 billion, the highest overall deal value of the year, for the bundled package of the Yenikoy (2 x 210MW) and Kemerkoy (3 x 210MW) lignite power plants. Likewise, Elsan Elektrik placed the highest bid, $1.1 billion, for the Yatagan lignite power plant (3 x 210MW), and $350 million for the Catalagzi coal power plant (2 x 150MW).

The last tender of the year was for another bundled package, the Orhaneli (210MW) and Tuncbilek (1 x 65MW + 2 x 150MW) lignite power plants, which ended with Celikler Holding placing the highest bid of $521 million. 

The rest of the deals in power generation involved renewable energy assets. The acquisition of a 45 percent share in Polat Enerji by the Canadian Public Pension Fund was significant. Accordingly, the 10-year feed-in tariff system must have proven reliable to such a large pension fund seeking a steady income. 

Although the deal number doubled and the total deals value increased in the oil and gas sector in 2014, these are still a fraction of the total figures. Gradual share acquisitions finally resulted in full ownership of Turkey’s second refinery by SOCAR.

Given the domestic political environment and global energy dynamics, the hopes for consolidation and new deals in the energy sector will be postponed to 2016.
 

Mehmet Öğütçü, Chairman, Global Resources Partnership Ltd (UK). Murat Çolakoğlu, Partner, PwC Turkey.