(FROM THE WALL STREET JOURNAL 12/5/14)
By Justin Scheck and Shayndi Raice
When oil prices hit a trough, history points to a likely energy
industry response: mergers and acquisitions.
Price crashes in the early 1980s and late 1990s sparked a rash
of deal-making that reshaped the industry. A decline in the
mid-2000s led the giant firms to pick up smaller companies. Now,
with oil's price down 40% since June, bankers and investors are
hoping for a repeat.
Traders are betting on it: BP PLC shares jumped by close to 5%
Tuesday after an anonymous Twitter user claimed rival Royal Dutch
Shell PLC was going to make a bid. Spokesmen for BP and Shell
declined to comment
The oil-field services industry, which suffers when low prices
reduce oil-company spending, have produced the first big deals this
year. Last month, the second-largest oil-field servicer,
Halliburton Co., bid about $35 billion to acquire No. 3 Baker
Hughes Inc. France's Technip SA bid for a smaller services firm
last month, offering $1.83 billion to buy Paris-basedCGG SA.
Pascal Menges, a Lombard Odier manager whose funds hold shares
of shale-focused U.S. energy companies, said he expects to see an
uptick in acquisitions and asset sales if low oil prices continue.
Low prices, he said, could put some small and medium-size companies
into a "distressed situation" that forces them to unload property
to raise cash or sell out completely.
Past consolidations took place after a prolonged slump in crude
prices and often during a period of weak energy-stock market
valuations. In contrast, this year's crude price decline has lasted
about six months.
Brent, the global oil benchmark, slipped to a four-year low
Thursday after Saudi Arabia cut the price of its oil in the U.S.
The price fell 28 cent to $69.64 a barrel on ICE Futures
Europe.
Big deals among oil producers may be harder now than in the past
because there are fewer largecompanies left, said Oppenheimer &
Co. analyst Fadel Gheit.
The deep price drop of the late 1990s led to the consolidation
of the so-called supermajors, the handful of huge, integrated
oil-producing and refining companies that operate around the world.
BP acquired Amoco and Arco, Exxon bought Mobil, and Chevron Corp.
snared Texaco. That left the industry with about half-dozen big
integrated players and a flock of much smaller companies that live
and die on finding and producing new resources.
Since then, much of the industry's merger activity has involved
big companies buying smaller companies to gain access to new energy
sources, or in some cases companies shedding exploration assets or
businesses that drag on profits. Shell, for example, has sold oil
fields in Nigeria, while U.S.-based Hess Corp. has gotten rid of
assets related to refining.
Overall, oil and gas deals have slowed over the past few years,
according to data from researcher Dealogic, as big oil companies
have come under pressure to reduce spending. The $242 billion in
deals globally in 2013 was the lowest since 2009, Dealogic said.
This year activity is up with nearly $300 billion in announced
deals so far.
Now, London investment bankers -- who handle a large portion of
global oil transactions -- say such deals are likely to pick up
again. Dropping oil prices have slashed the value of smaller
exploration and production companies, giving some a market
capitalization less than the value of their assets. London-based
Ophir Energy PLC, for example, has a market value of about $1.25
billion, less than the $1.49 billion in its cash holdings at the
end of June.
Some of those companies see deals as a way to survive the
downturn. Ophir agreed last month to buy rival Salamander Energy
PLC for less than $500 million. An Ophir spokeswoman said the deal
hasn't closed yet.
When it comes to bigger mergers, bankers say, companies must
first decide the market is predictable enough to start making
long-term decisions. buyers want to see if prices keep falling
before committing, while sellers are trying to avoid selling when
the market is at a low.
Viswas Raghavan, head of investment banking for Europe, the
Middle East and Africa at J.P. Morgan Chase & Co., said there
hasn't been a lot of deals in the energy sector yet because "a lot
of these developments have happened very quickly." He added, "If
you're in that sector, you're caught in the same valuation
downdraft."
Mr. Raghavan said he expects deals between companies that have
real synergies. "Opportunism does play a part but it can't be the
driver."
Since many small oil companies still need cash, and large ones
need resources to replenish their reserves, "you'd be more likely
to see bits and pieces getting sold," another banker said. For
example, India's ONGC Videsh Ltd. has been talking to Tullow Oil
PLC about buying some assets.
Energy bankers said it is still possible to see a return of the
megamerger. Shell talked internally and with bankers about merging
with BP and BG Group PLC, said people involved in those talks. Such
deals are complicated, but also offer the most potential upside,
said Oppenheimer's Mr. Gheit, because of potentially economies of
scale.
Several bankers say BG, which owns stakes in oil and gas fields
from Brazil to the North Sea, could be a target for a large
company. BG, valued at around $50 billion, is about one-eighth the
size of ExxonMobil. Its shares are currently trading at their
lowest level for five years.
But the company recently hired a new chief executive. BG said it
doesn't comment on market speculation.
Access Investor Kit for Tullow Oil Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB0001500809
Access Investor Kit for BP plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB0007980591
Access Investor Kit for BG Group Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB0008762899
Access Investor Kit for Royal Dutch Shell PLC
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB00B03MLX29
Access Investor Kit for Royal Dutch Shell PLC
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB00B03MM408
Access Investor Kit for Salamander Energy Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB00B1GC5238
Access Investor Kit for Ophir Energy Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB00B24CT194
Access Investor Kit for BG Group Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0554342032
Access Investor Kit for BP plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0556221044
Access Investor Kit for Royal Dutch Shell PLC
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US7802591070
Access Investor Kit for Royal Dutch Shell PLC
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US7802592060
Access Investor Kit for Tullow Oil Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US8994152028
Subscribe to WSJ: http://online.wsj.com?mod=djnwires