ENRC, First Quantum, Fortescue or even Anglo American. The list of potential takeover targets for Glencore-Xstrata is long. But the fixation on mining mergers and acquisitions could be a mistake. Oil could play a big role in Glencore’s strategy too.
“Glenstrata”, which this week received investor approval but still needs to clear antitrust regulators in China and South Africa, certainly would have a strong M&A appetite.
Glencore has said that one of the attractions of the merger would be a stronger balance sheet to pursue larger deals in commodities.
Industry executives believe that Ivan Glasenberg, Glencore’s boss, would embark immediately on a buying spree of mining assets. For sure, he will buy anything cheap in mining that generates a strong return on equity.
ENRC, in particular, looks very attractive. Its share price is almost at the same level as in 2008, down roughly 60 per cent since January. And Glencore loves the asset. But do not forget about oil and gas, an area where the trader has long-held ambitions.
Glencore has significant mining assets, particularly in Colombia, South Africa and central Africa, and a merger with Xstrata would increase the portfolio. The trading house has also expanded significantly in agriculture with the recent $6.1bn acquisition of Viterra, the Toronto-listed grain trader.
Its portfolio of oil and gas assets is relatively small, however. Glencore owns between 40 and 49 per cent in various production subsidiaries of Russneft of Russia. It controls Chemoil Energy, a supplier of marine fuels, and has stakes in several oilfields in west Africa. It recently invested $331m to buy a stake in several oilfields in Chad.
The relatively small presence of Glencore in oil production is not due to a lack of interest in the sector, but to the fact that oil investments big enough to be profitable are costlier than mining assets. The merger would help the trader to overcome the “ticket size” problem.
Moreover, Glencore is beginning to enjoy the benefits of its oil investments. With the commodity trading above $100 a barrel, oil production is very profitable.
Early this year, it began producing 62,000 barrels a day from the Aseng oilfield, in Equatorial Guinea, in which it has a 23.7 per cent stake. In the second half of next year, it should start pumping from the Alean field, in which it has a 25 per cent interest. Both fields are operated by Noble Energy of the US.
Mr Glasenberg has been telling investors that he wants to build a diversified natural resources portfolio. If so, he needs to build up assets in oil and gas – as he did early this year in agriculture.
The Commodities Note is a daily online commentary on the industry from the Financial Times