IN THEW NEWS / Lasmo Plc & Enterprise Oil Talks Signal E&P Pain
LONDON, Jan 11 (Reuters) - Lasmo Plc <LSMR.L> and Enterprise Oil Plc's <ETP.L> merger talks show the intensity of the pain inflicted on the exploration and production industry by the collapse in oil prices, analysts said on Monday.
Analysts are forecasting $11-14 a barrel for Brent crude in 1999, after the $9.55 12 year low plumbed in 1998. At that forecast level, E&P companies, mostly U.S. and UK groups, are not profitable. An operating "breakeven" price is seen at $7-9 a barrel, but that assumes no investment in a very capital intensive industry -- and therefore a sector doomed to shrink or be swallowed.
"At these prices they (E&P companies) are not financially competitive. That means they are not generating cashflow, paying competitive dividends or delivering satisfactory returns on capital", said E&P specialist Tim Whittaker at Commerzbank.
Keith Palmer, vice chairman of investment banking at Rothschild and a specialist in the oil industry agrees. "Bluntly, if oil prices remain at current, very depressed levels for much longer, the smaller E&P companies have a very bleak future", he said in a recent presentation.
So the pressures for E&P groups to run into each other's arms are real -- but analysts note big is not necessarily beautiful and not every combination will create a more financially competitive model.
Analysts are not convinced a Lasmo-Enterprise combination would deliver. A tie-up might be seen as a desperate attempt to ward off predators and put a floor under plummeting market value, rather than a plan to produce significant cost saving synergies, they said.
Enterprise's assets in the North Sea and other developed zones do not overlap now with Lasmo's more far flung empire in Libya, Pakistan and Venezuela "any more than they did in 1994", when Enterprise failed in a 1.5 billion pound takeover bid for Lasmo, one expert said.
Even in the UK, there is no real fat to trim, because Lasmo more or less abandoned its London operation with a cost cutting move involving 200 job cuts late last year.
"It's hard to see where the synergies are", said Barney Gray of Williams de Broe. "You have to wonder about what the motivation is".
Another UK-based analyst said "The combined group would just make a bigger oil company. They are still going to be in the same financial condition". Lasmo Chief Executive Joe Darby said only last week that "making E&P companies twice as large does not necessarily create more value".
Integrated oil companies can survive sustained oil price weakness, protected by the vertical integration that offers a trade off on refined products as well as by their size, analysts said.
Many have the cash resources to acquire companies if they can identify value. Groups like Lasmo and Enterprise have no such protection and are vulnerable.
"In the UK, investor sentiment for the E&P sector is so poor and concern about future prospects so great that acquisition for cash may be achieveable at relatively low premia over current trading values," said Rothschild's Palmer.
Analysts said Lasmo and Enterprise are considered probably too small for the giants like BP Amoco and Exxon to consider, but France's Elf Aquitaine <ELFP.PA> and ENI <ENI.MI> of Italy are said to have run their eyes over Enterprise, while BG Plc <BG.L> of the UK has also been linked to the group, a former stablemate under the state-owned British Gas banner.
U.S. mid-sized E&P groups among whom consolidation is already under way may be more interested in Lasmo, whose oil finding costs and asset spread are attractive relative to their own, analysts said.
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