Oil companies have been consolidating to remain in business since the early days of Rockerfeller.
"Consolidation was the oil companies' savior," Simmons & Co. President Matt Simmons told attendees at Offshore Technology Conference in Houston.
Taking a look around the compound names favored in the oil industry, it's easy to see the genealogy - ExxonMobil and ConocoPhillips for example - despite the current trend to drop back to single names: BP Amoco returned to BP and TotalFinaElf returned this week to Total.
Simmons noted that some businesses have adopted the merger strategy to improve stature at the negotiating table while the majors sought supermajor status to increase their reserves. Bigger is better. Or is it? The majors, he said, had hit a point where they could no longer reasonably increase reserves through the drill bit. In fact, he said, the supermajors spent $150 billion from 1999 to 2002 and only increased output from 16.1 MMboe/d to 16.7 MMboe/d. ExxonMobil is one company that has acknowledged the difficulty in continuing to grow, which appears to be Wall Street's assurance of goodness.
"The stock market is a terrible jury to determine fair value," Simmons said.
Simmons said it is difficult to tell just how beneficial the constant consolidation in the industry is without considering the nature of the deal in terms of purchase price and management teams.
"I can't remember ever seeing a bargain that either didn't close or wasn't overpriced" once facts were known, Simmons said.
Consolidation has definitely had some effects on the number of wells drilled, he said, though he said it's difficult to tell if the decrease is a bad effect.
"Consolidation benefits are not automatic," Simmons said. "They take work."
He also said he is not sure what effect consolidation has had on the development of technology, but he did note that the major service companies have been focusing more heavily on R&D now than in the past.
"Consolidation is now at a really important crossroads," Simmons said, adding that spinoffs are not an unreasonable expectation.
(5/7/03)