LONDON, Feb. 20�Jeremy Wilson, JP Morgan's global head of energy mergers and acquisitions, predicted the global oil and gas industry would see another wave of major mergers within the next 2 years as the "bigger is better" trend in consolidation continues.
Wilson, speaking at the Institute of Petroleum meeting, said there were still "two or three major mergers to be done" in the near future because global equity markets continue to reward oil companies that have scaled up their market capitalization through acquisition with higher share prices.
"This is a self-evident truth. The equity markets are assigning higher multiples directly correlating to size," he said. "And this relationship is still going strong."
He said European companies including OMV AG, Veba Oil & Gas GMBH, and Poland's PKN are prime candidates for combination as the continental oil and gas companies' executives move to create a "regional champion." There remains a question over whether Russian oil companies�"with their built in cash flows and war chests"�become involved in the consolidation process, said Wilson.
He said the success of the BP Amoco PLC, TotalFinaElf SA, and ExxonMobil Corp. mergers will fuel the consolidation trend because those have "largely made good" on their promises to shareholders of synergies linked to increased profitability, growth through access to upstream areas, and "gap filling" through acquisitions.
"BP announced synergies of around $2 billion/year," noted Wilson. "So far it has achieved a little in excess of that; Total is also well on the way to fulfilling its promise; ExxonMobil, likewise, announced synergies of around $3 billion and it has been delighted by the cost cutting in the Exxon and Mobil portfolios�as of today it is expecting synergies from the combination of a little less than $5 billion/ year."
"If you add the synergies promised during the last merger wave, the total comes to more than $10 billion/year," he emphasizes. "If we take a typical ratio to capitalize the value of those savings you will get a shareholder value creation in the region of $100 billion."
The cost cutting achieved by the megamajors via synergies will continue to place extreme pressure on those oil and gas companies that have yet to grow through acquisition. One exception, Wilson points up, is the Royal/Dutch Shell Group, which has managed to trim some $4 billion out of its business units�a target revised upward to $5 billion last December�without playing the merger card.
He noted that ENI SPA, Repsol YPF, Conoco Inc., and Phillips Petroleum Co. had all been "widely rumored" be weighing up various corporate combinations, and that "only time will tell whether they can carry on as independent entities or will be forced to merge to gain scale and scope."
Growth achieved through the addition of reserves, another of the promised immediate benefits of major acquisitions, will prove more difficult to sustain, said Wilson. Megamajors will, on average, have to add some 30% to their current reserves base to meet announced targets, with ExxonMobil, for one, having to grow its reserves by more than a third by 2004.
The disappearance of many independent oil and gas companies through takeover over the last 2 years�including British-Borneo PLC and Saga Petroleum AS�Wilson believes flags up the reality that "the smaller E&P company is becoming increasingly irrelevant to the larger fund manager.
"These fund managers have billions of dollars to invest in the equity markets, and they cannot afford to analyze and understand the smaller companies. They have many companies to choose from with market caps of over $2 billion, and for many of the smaller E&P companies, the liquidity is just not there," he said.
"For these independents to continue to be successful going forward they have to be able to clearly demonstrate a very competitive niche�and a way to beat the megamajors who have scale economies."