ANALYSIS-Hard choices for Midsize Oil after
mergers
By William Maclean
LONDON, June 4 (Reuters) - The birth of oil's supermajors is pushing medium sized
companies unable to compete in scale to seek specialist niches and alliances or risk
oblivion.
Being nimble and innovative rather than merely larger will be vital goals for middle
ranked firms left on the shelf amid a flurry of combinations reshaping the industry,
analysts say.
''Companies that fail to act may lose control of their destiny, becoming acquisition or
breakup targets,'' said a report by consultants McKinsey.
''A lot of assets are being sold and this is where the companies are buying and developing niches,'' said Gil Gidron, a
Madrid-based partner of Andersen Consulting.
While an orgy of asset-stripping and cost-cutting pushes Big Oil up Wall Street's rankings, lesser fry must court investor applause
by making more efficient use of capital and resources.
Options being examined include global tie-ups, especially in deregulated gas and power, and regional links using purchases of
marginal fields and refineries shed by merging goliaths.
''Being big offers some great opportunities. And being nimble offers some other great opportunities,'' said David Moore, a
partner in the Houston office of Arthur Andersen.
What will not work is a me-too strategy of merging merely to compete in size with top guns Exxon Mobil (NYSE:XON - news)
(NYSE:MOB - news), BP Amoco (quote from Yahoo! UK & Ireland: BPA.L) and Royal Dutch/Shell .
The bulk of huge mergers may have already happened, and with each new tie-up the list of partners narrows.
In any case, unions of small or medium scale companies have not been well received by markets, providing savings that mostly
look puny against those to be enjoyed by the new supermajors.
An example is fourth largest U.S. oil company Texaco (NYSE:TX - news), which won widespread praise on Wall Street this
week by abandoning exploratory merger talks with Chevron (NYSE:CHV - news).
Texaco, whose proposed combination would still have been much smaller than any one of the industry's big three, cited
''complexity, feasibility, risk and price'' as problem areas.
''We've had a very good run of mergers and acquisitions upstream but arguably it's coming towards the end,'' said Keith Palmer,
vice chairman of investment banking at N.M. Rothschild.
He notes the largest companies have provided better returns for equity markets than their midsized, broad-based competitors.
But all is not lost. Provided smaller firms choose the right strategy they will be able to build distinctive advantage and thrive
despite a lack of comparable world class scale.
''In the upstream, there are people who are extraordinary at shallow water, deep wells. Then there are people who are very good
at deep water, shallow wells,'' said Moore.
''Those people can find opportunities all over the planet.''
McKinsey sees four main strategy choices for midsized firms.
One is to create niches through superior skills and brands. An example is U.S. gasoline refiner Tosco (NYSE:TOS - news), a
talented bargain hunter which scooped up convenience store chain Circle K as well as refining assets from the majors and wove
them into a coast-to-coast network. Now it is moving into Europe.
Other such potential global niches include downstream gas, consumer motor oils, marine fuels and jet fuels.
Another strategy is to reshape relationships with what McKinsey calls the industry's assured survivors -- the megamajors, the
national oil companies and OPEC countries.
Most of these possibilities lie upstream, where specialist players are forming alliances with national oil companies.
Oil services firms Baker Hughes(NYSE:BHI - news)/Western Atlas,(NYSE:WAI - news) Halliburton(NYSE:HAL -
news)-Dresser(NYSE:DI - news) and Schlumberger (NYSE:SLB - news) market resource management tie-ups, although they are
unlikely to want to compete directly against their largest oil company clients.
Medium sized oil companies could take the same route, possibly by tie-ups with service firms or by posing as the partner of
choice for a megamajor in a specialised skill.
A third choice is geographic franchise. An example is Unocal (NYSE:UCL - news), which developed a strong position in
southeast Asia starting from an upstream position in Thailand and expanding through upstream-related activites, especially in gas.
Petronas, in Malaysia, has used international alliances to build skills and used relationships to expand in Moslem nations.
A fourth, much-tried strategy is opening new oil- or gas-related businesses such as electric power, or energy-related sectors such
as water which Enron (NYSE:ENE - news) has recently entered.
As always, management efficiency gains promise big savings in sectors such as processing of upstream data.
''Only a third of an oil company scientist's time is spent doing analytical work. Two thirds of the time is spent trying to get the
information to do that analysis,'' said Andersen's Moore.
''That two thirds is what we are working on. That's where the time is. There is enormous leverage.''
More Quotes
and News:
NYSE:DI - news; NYSE:WAI - news
Baker Hughes Inc (NYSE:BHI - news)
Chevron Corp (NYSE:CHV - news)
Enron Corp (NYSE:ENE - news)
Exxon Corp (NYSE:XON - news)
Halliburton Co (NYSE:HAL - news)
Mobil Corp (NYSE:MOB - news)
Schlumberger Ltd (NYSE:SLB - news)
Texaco Inc (NYSE:TX - news)
Tosco Corp (NYSE:TOS - news)
Unocal Corp (NYSE:UCL - news)
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