Selling Lucrative Assets to Reduce Debt
The Korea National Oil Corp. (KNOC) has taken the first step toward reducing its debt and stabilizing its business. The state-run firm decided to sell off its stake in the Eagle Ford Shale Play in the United States, which takes up the lion’s share of its overseas assets. When the sale goes through as planned, the KNOC is expected to lower its debt ratio substantially from the current level of over 900 percent.
According to investment banking (IB) industry sources on Nov. 7, the KNOC selected Citigroup Global Markets Securities as the lead manager for the sale of the Eagle Ford Shale Play.
The Eagle Ford is a shale gas field located in the Maverick Basin, Texas with estimated reserves of 500 million barrels. The KNOC acquired a 23.67 percent stake in the gas field for 1.75 trillion won (US$1.55 billion) from U.S.-based oil firm Anadarko Petroleum Corp. in 2011. In 2012, the National Pension Service and other domestic investors bought a 5 percent stake in it through a 550 billion won (US$490.63 million) fund established by South Korean private equity fund firm Vogo Investment, currently VIG Partners.
The Eagle Ford is considered the KNOC’s most lucrative resource development project overseas. It produces not only shale gas but also ultra light oil, or condensate. As such, global investment banks are said to be interested in investing in it.
The KNOC was able to receive 452.6 billion won (US$403.75 million) of investment from the JB Asset Management-Hana Financial Investment consortium in 2016 when international oil prices were between US$30 to US$40 (33,630 to 44,840 won). Last year, U.S.-based energy firm Sanchez Energy Corp. formed a consortium with the world’s largest private equity fund Blackstone Group to purchase the stake of Anadarko, which was the largest shareholder of the gas field project, for US$2.3 billion (2.58 trillion won).
This is why the KNOC is forecast to make a hit by selling off its stake in the Eagle Ford. An official from the IB industry, who is well-versed in the global resource market, said, “Last year, a U.S.-based buyer asked if it is possible to buy the KNOC’s stake in the Eagle Ford. There will be no difficulty in selling the stake.”
The key is the price. The book value of the KNOC’s stake in the Eagle Ford was 1.46 trillion won (US$1.3 billion) as of 2017. The figure slightly fell as the Eagle Ford posted 148.2 billion won (US$132.20 million) in net loss in 2016 due to a drop in oil prices. However, the stake is highly likely to be sold at a higher price than the book value since it turned into a profit in 2017 and the international oil prices reach nearly US$80 (89,680 won) this year. An official from the industry said, “The U.S. shale gas market is heating up to such an extent that even money-losing shale gas fields are sold. The Eagle Ford turned around last year and oil prices have surged so it can receive a fair price.”