OREANDA-NEWS. March 31, 2015. Many have been waiting for mergers and acquisitions— particularly in E&P sectors — to pick up in light of low oil prices, and one case of a downstream-focused company considering acquiring an oil producer caught the attention of Tamsin Carlisle in this week’s Oilgram News column, Petrodollars.

During periods of low oil prices, opportunities to acquire exploration and production assets at bargain prices often present a silver lining for well-capitalized companies.

In theory, producers that build their asset portfolios during price downturns should outperform rivals that merely seek to ride them out. Industry consolidation can facilitate greater operational synergies and economies of scale, enabling more oil to be produced for less. But there are many potential pitfalls.

From state companies to hedge funds and established majors, low oil prices have brought out investors of all stripes looking for discounted oil assets.

NOCs of major Middle East oil exporters are particularly well-positioned to benefit from the current landscape, as the companies are backed by the financial resources of governments that take long-term strategic approaches to oil development. Moreover, they have access to debt financing on more favorable terms than equivalent private-sector companies, said Richard Forrester, A.T. Kearney’s global lead partner for energy practice.

Many industry observers are therefore closely watching the NOCs and sovereign wealth funds of Gulf Cooperation Council countries — Saudi Arabia, Kuwait, Bahrain, Qatar, the UAE and Oman — for clues to government oil strategies and their potential impacts on future oil output.

However, the ground rules under which NOCs operate vary substantially throughout the GCC, making it hard to predict acquisition trends.

One case requiring scrutiny is the recent proposal by Dubai government-owned Emirates National Oil Co. to acquire the 46% of Turkmenistan-focused producer Dragon Oil that it doesn’t already own. Predicting what such a deal would mean for oil supply is substantially complicated by special circumstances pertaining to ENOC.

The company is distinguished from most other NOCs in the region by its strong downstream focus. ENOC’s major business activities are petroleum refining, marketing and trading, and terminal operations. Its sole upstream asset is its 54% stake in Dragon.

This is not the first time ENOC has tried to take Dragon private. A roughly \\$1.6 billion offer for 48% of Dragon’s shares in 2009 was scuppered by minority shareholders, led by Baillie Gifford. The Edinburgh investment group strenuously argued that ENOC’s offer, made in the aftermath of a 75% plunge in international oil prices from record highs reached in mid-2008, was opportunistic and undervalued Dragon’s potential.

This time, ENOC may have a better chance of success, as the current oil price downturn seems set to last longer than the previous one. Regardless of prevailing international oil prices, however, a new take-out offer for Dragon would need to be valued at well over \\$2 billion to account for the nearly \\$2 billion in cash and equivalents that Dragon has amassed and 45,000 b/d of crude production.

ENOC discloses little financial data and is not closely followed by analysts, yet a picture has emerged of a company anxious to develop new revenue streams to offset money-losing domestic operations. Its main problem is its government-imposed responsibility to supply subsidized gasoline to motorists using Dubai filling stations. The subsidies cannot easily be phased out without an agreement with neighboring Abu Dhabi emirate to do the same, but ENOC lacks Abu Dhabi National Oil Co.’s access to domestic crude supplies and must import oil products at international prices.