What actions do the others take
Low oil prices were not a key factor in the recent marriage of the majors, although a continuation may force some of the smaller independents together. This was one of the conclusions to emerge from the "M&A in Global Oil and Gas" event in London, organized by IBC Global Conferences.
Some oil companies may not want to fuse and may not even need to, according to other speakers. However, all companies have suddenly been forced to re-examine their strategies and value to shareholders. Organic growth alone may not allow them to compete with the new elite of mega-majors for the best opportunities.
It was suggested that the Total/Petrofina union appeared to lack logic, in that it re-exposes Total to North American downstream liabilities. But in the case of Exxon/Mobil and BP/Amoco, there are evident synergies which can further these groupings' upstream, as well as downstream, ambitions.
As Mark Bentley, the London-based director of Lehman Brothers' Mergers & Acquisitions Group pointed out in his paper, BP has added Amoco's strengths in polypropylene to its own in polyethylene. Their combined chemical operations will approach $13 billion in sales. Mobil, meantime, will strengthen Exxon's position in olefins, and they will also be complementary in polyethylene and paraxylene.
As Exxon was already the world's third-ranked chemicals producer in value terms, the new company will be well positioned for any upturn in Asia's petrochemicals market. But according to another analyst at the conference, there may be bigger stakes to play for. Saudi Aramco has all necessary upstream capabilities, but is weaker in petrochemicals. Companies that can provide that backup will be best placed to partner Aramco when Saudi Arabia opens up E&P to the west.
Rumors aboundOf the recent mega-mergers, one involved companies headquartered in the US while another has its basis in western Europe. Ex-state owned European corporations like Elf and ENI have been implicated in the latest wave of rumors, and may already have found partners. One speaker at the conference saw problems from European governments if, for example, Chevron moved for Elf. But if Elf, on the other hand, came in for Conoco, objections from the US would appear less likely.
In Norway, there has been controversy over Statoil's decision to raise its stake in fellow Norwegian oil company Saga Petroleum. According to the same speaker, that highlighted the issue of Norwegian independents' status rather than focusing on what Norsk Hydro, Saga, and Statoil need to do in order to perform better internationally. Unless Statoil finds some way to grow markedly, he added, "Statoil will not be able to compete in international markets like Venezuela."
Rob Arnott, an analyst with Morgan Stanley, said that some of the UK-based independents in particular needed to adapt or face further de-rating on the stock markets. He claimed that several have under-performed of late, but were using low oil prices to cover their lack of progress. He also questioned their strategic credibility, citing Lasmo's recent decision to invest $453 million in its Venezuelan Dacion block operations - equivalent to an entire year's cash flow.
Arnott added that more independents like Hardy Oil & Gas/British-Borneo would be forced to merge just to stay in the bottom tier of oil companies. Some of those higher up could consider partial mergers, he said, such as Shell/Esso's or Mobil/Arco's recent alliance in the southern North Sea (although the latter may also be affected by the Exxon/Mobil merger).
Arnott conceded that in the current oil price crisis, there may be few options for the smaller independents to scale back costs. One Shell International delegate wondered whether certain oil companies would have to stop producing from assets that were no longer making profits.
Logical fitAccording to Lehman Brothers' Bentley, analysts have been convinced of the logic of the BP/Amoco and Exxon/Mobil mergers. In both cases, he said, the upstream fit appears reasonably good, achieves greater diversity, and improves the overall balance within both portfolios more towards gas.
He felt the estimated $2 billion savings alleged from the BP/Amoco collaboration - including $300 million from more focused exploration - was conservative, in view of BP's record in slashing its own costs this decade. Exxon's forecast pre-tax economies of $2.8 billion through subsuming Mobil also looked on the cautious side, he claimed, as these two companies combined will have double the revenue of BP/Amoco.
However, other oil companies which have not demonstrated tight control over internal costs could find themselves marked down heavily by the markets, if they attempt to amalgamate, Bentley warned.
Beyond rationalization and higher turnover, there are other pluses from attaining super-major status, he suggested. For any global investor seeking a properly diversified portfolio, holding stock in a super-major is a must. Also, there is a strategic advantage for the companies concerned. "The world has changed," Bentley said. "with oil companies inching towards very large bets, such as deepwater drilling, or Mobil's in the FSU. You don't need to be mega-companies to take these risks, but maybe those companies now want to embrace risk.
"If you believe you have the size, the technological advantage, the ability to influence governments, to coordinate a gas project - maybe you feel you don't want to share that risk, but rather to manage these projects alone."
Whether BP/Amoco retains the supermajor premium from investors will depend on its long-term results, said Bentley. In the US, BP is viewed loftily by investors, having transformed itself from a company with excessive gearing and a market tag of just over £10 billion at the start of this decade. Pooling its gas resources with those of Amoco should also improve its cash flow, he added, especially if this is sold for electricity generation.
Organic growth - the way forward, according to the majors two years ago - would not have allowed BP to touch Shell or Exxon for size, Bentley claimed. Even if the recent top five "elephant" finds had been added to BP's portfolio, they would only have added 10-15% to its market capitalization. It would have taken BP 15-20 years to catch Shell and Exxon through purely organic growth. "The alternative strategic move was to apply the BP medicine to another company," he concluded.
As for Amoco, it was not failing as a company, but its long-term outlook was perceived to be worse than those of other majors. In recognition of this fact, Bentley said, the company was the first and only US-based major to cut its 1998 capital budget. On the other hand, its reserve replacement costs performance was better than most - $3.69/bbl in 1997, against an average for the majors of $4.80. However, its cash flow growth per employee from 1993-97 was less than half BP's record of 18% per annum.
"Out on a limb"Majors still "out on a limb"' may not be at a disadvantage competing with the super-majors for high profile international projects. But as the size of the individual "bets" concerned increases, even doubles, they may lose out, he suggested.
What the recent deals have done is to force every player in the oil industry to look around and re-appraise their competitive position. However, those contemplating union must be sure of a good fit, he counseled.
"If the consequence of a 'mega-deal' is years of internal paralysis and fighting, then they are best left alone," he concluded.
Petrofina strengthens Total's global upstream credentialsSome analysts have suggested that the coherence of the Total/Petrofina tie-up has not been too well communicated. A report on the merger by Wood Mackenzie identifies pluses and minuses. The scope for corporate savings looks limited, they say, given the determination to retain two sets of headquarters in Brussels and Paris.
On the other hand, the upstream synergies look good in the USA, West and North Africa, and in particular the North Sea, which should reduce Total's current over-reliance on the Middle and Far East. The North West Europe portfolio now stretches from the Barents Sea to the southern UK gas basin, contributing 360,000 boe/d combined this year - around
a third of the new company's global production. In the southern sector, Fina Petroleum Development has just completed an asset exchange with BHP, making it operator of three blocks containing the Orca and Beta discoveries. These assets, according to Fina, form the basis for a potential 1 Tcf development.
Total's Norwegian holdings were dominated by small, non-operated gas interests in fields such as Asgard, Frigg, Oseberg, and Troll. But there is one overlap, in Ekofisk, which is Fina's key Norwegian upstream asset. In the UK sector, both companies have a good spread of mid-size concerns. Fina brings strength in the central UK North Sea where Total has been weak, as well as operatorship of the probable Otter Field development in the northern North Sea.
Wood Mackenzie values the combined North Sea package (excluding exploration acreage) at $4.4 billion, ranking the new company sixth in the North Sea league. Output expected shortly from Asgard in mid-Norway will further boost production levels.
Copyright 1999 Oil & Gas Journal. All Rights Reserved.