IN THE NEWS / ANALYSIS-Oil Industry Shake-Up Heats Up, Breaks Records
10/30 12:31
NEW YORK, Oct 30 - Not since the rough and tumble days of John D. Rockefeller has the oil industry faced such a fundamental shake-up.
Even before the end of October, global oil mergers have topped $112 billion so far this year, smashing all previous records and more than the last two years combined, according to Securities Data Co. figures.
Experts say there are three distinct forces driving the restructuring of the world's biggest industry, with this past year's oil price slump the least of them.
For the top league of oil companies, size matters more than ever, as developing the all-important "world class" oil discoveries these days requires billions of dollars, years of commitment, and political clout.
At the same time, analysts say, the consolidation of the refining and marketing sector has been driven by a need to cut costs to the bone in an era of chronic overcapacity. Meanwhile, among the smaller oil explorers, which are most exposed to oil price fluctuations, the financially strong are gobbling up the weak.
Top of the industry agenda is the emerging "Super League" of companies valued at more than $100 billion dollars. British Petroleum Co. PLC <BP.L> joined this exclusive club two months ago with its $55 billion takeover of Amoco Corp.<AN.N>, creating a company with a market value of about $110 billion, and pitching it into the same class as Exxon Corp.<XON.N> and Royal Dutch/Shell Group <RD.AS><SHEL.L>, both valued around $150 billion.
Such potential powerhouses bring back memories of Rockefeller's Standard Oil trust, a company the famed robber baron built up until it was forced by the courts to remove its stranglehold on the industry in 1911. Today's biggest oil companies, including Exxon and Amoco, can trace their geneaology to the Standard Trust.
The BP/Amoco merger left the likes of Mobil Corp. <MOB.N> and Chevron Corp. <CHV.N> -- formerly Rockefeller's east and west coast operations -- contemplating their futures and, possibly, a future together. Among other potential entrants are Texaco, ARCO and European concerns like Elf Aquitaine <ELFP.PA> of France and ENI <E.N> of Italy.
"Until the BP-Amoco deal, many majors contended that big deals weren't necessary, and they were probably the wrong thing to do," says Marc Granetz, co-head of natural resources at Credit Suisse First Boston. "For many majors, that thinking has now changed. For the majors who compete for concessions around the world, size means status, and status matters."
Companies need to be able to take what BP chief executive John Browne has described as a "decisive stake" in huge long-term projects, like those around the Caspian Sea, in Russia's Sakhalin Island, or in the deepwaters off Angola.
"A $2 billion project in the context of a $50 billion balance sheet can be cause for some concern. However, with a $200 billion balance sheet, that project suddenly becomes far more palatable," says Doug MacKenzie, managing director and head of the global energy division at Morgan Stanley Dean Witter, one of the advisors on the BP-Amoco deal.
"Within most of the major oil companies we're seeing an interest in consolidation as they continue to (try) to improve their performance," MacKenzie explains. "But it begins with a desire to try to manage risks and achieve top-line growth as opposed to just cutting costs."
Big oil companies have also been busy combining their low-margin refining businesses to cut out billions of dollars of costs and, crucially, to gain market share.
Some, like Unocal Corp. <UCL.N> , have sold off refineries and gas stations. Others, including Texaco Inc. <TX.N> and Phillips Petroleum Co. Inc. <P.N>, have effectively farmed out management and kept minority stakes. This has made room for the emergence of new American companies like Tosco Corp. <TOS.N> and Ultramar Diamond Shamrock Corp. <UDS.N>, top independent refiners created out of a series of acquisitions in the past few years.
Though they don't volunteer it, a key goal is to reach a critical market share, which in the U.S. means around 10 percent or more.
"In the 'downstream,' market share is vitally important, but something nobody will talk about because of anti-trust problems," says one banker.
The action in the independent oil exploring sector is less fundamental, more cyclical. Companies with cash looking to grow can invest trying to find oil themselves, buy existing oil wells or, when oil and stock prices are low, buy other companies.
"For independent companies that are highly leveraged, low oil prices are hurting them because of reduced cash flow and trouble servicing debts," says Michael Wang, a mergers and acquisition specialist with John S. Herold, an oil industry appraisal firm.
"They need to be under the wings of larger companies with sound balance sheets," he adds, citing the $1.7 billion takeover of the highly-leveraged Oryx Energy Co.<ORX.N> by Kerr-McGee Corp.<KMG.N> earlier this month.
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