Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: SliderOnTheBlack who wrote (33560)	12/26/1998 11:55:00 PM
From: Tomas	Respond to of 95453

British Oil independents face pressure to merge Sunday Times, December 27 The low price of oil and the high cost of producing it will force the smaller companies to get together to survive, writes David Parsley EVEN in a year of huge mergers the numbers thrown up by the oil industry marriages dwarf anything else Wall Street or Europe's financial markets can offer. Exxon's £144 billion deal with Mobil was done in the same week France's Total did a £25 billion tie-up with Petrofina of Belgium to create the world's sixth-biggest oil group. They came only a few weeks after the £90 billion merger of British Petroleum and Amoco. Now the City's attention is shifting to Britain's independent exploration and production (E&P) sector, where a wave of deals is expected. "It is like dogs in the park," says one oilman. "Everyone is sniffing everyone else." Another says: "The E&P sector is in dire condition. There will need to be mergers so companies can spread costs over a wider business but for some smaller companies the game may be up and we could see some insolvencies." The climate is cold. The oil price fell below $10 a barrel last week, taking oil, in real terms, back to its value before the 1970s crises, and many company bosses are starting to feel the need to huddle together to keep warm. The independents may be a lot smaller but they face many of the same pressures that are driving the consolidation higher up in the sector. The bombing of Iraq caused a leap in the price but it quickly fell back again and the gloom returned to the sector. Their market values have slumped. Enterprise Oil and Lasmo were once members of the FTSE 100 index. Today Enterprise, the sector leader, is Britain's 136th biggest company, valued at £1.4 billion. Lasmo is at 168, valued at £985m. British Borneo's market value has slumped from almost £1 billion to £391m. Monument Oil & Gas is down to £315m. Premier Oil is worth £158m. And Cairn Energy, which once had a value of £850m, is worth just £148m. Britain's seven main independents will earn just 5% on their capital this year, against the big boys' 16%. They make just 50p profit per barrel - a third of the industry average. These figures lead Tim Whittaker, the Commerzbank analyst who collated them, to a stark conclusion. All seven should be merged into a "UK Exploration plc", he says. About £1 billion could be saved on exploration in five years, boosting cashflow by 50%. Whittaker's idea may not come to fruition but it does hint at a way forward. Indeed, merger activity has already started. Three months ago British Borneo did a paper takeover of Hardy, and other E&P companies are positioning themselves to join up with rivals. Lasmo is the most frequent name on people's lips because its share price is collapsing. One possibility is that the old emnity between Enterprise and Lasmo will be forgotten and that the two will get together. In the late 1980s the two companies had regular flirtations made warmer by shareholding links. But no deal could be done and finally Enterprise mounted a hostile takeover bid four years ago only to see it founder. So will Sir Graham Hearne, Enterprise's chairman and its leading light since it was floated by the old, state-owned British Gas Corporation, finally achieve his ambition? Lasmo's chief executive, Joe Darby, certainly did nothing to improve his City reputation with his £30m cost-cutting move, which was intended to make "Lasmo fit for a low oil price". Analysts saw the rationalisation as a desperate measure. As for Britain's other E&P groups, they are a mixed bunch of companies and characters. The City has its favourites and those it feels are vulnerable in these difficult times but such perceptions may alter if the environment changes. If the oil price recovers, investors' opinions will shift - for example, an asset in Albania will not necessarily be a bad asset if the oil price rockets. But for Premier such assets are viewed as dangerous at the moment. Of all the British independents, Premier is the one seen as most exposed to a weak oil price. Observers believe Charles Jamieson, its chief executive, should be worried. With the shares losing more than 50% in less than a year, one expert claims Premier is in most need of support. Whether the support comes from a merger will have a lot to do with Amerada Hess, the American company that owns 25% of the equity. It is understood to have surveyed suitors but has not gone so far as to sit round a table with anyone. Monument is in a strong position and may even be able to gain long term from the turmoil by snapping up cheap assets from distressed sellers or by buying whole companies. While most oil bosses fall in and out of favour, Tony Craven Walker, its chairman, has consistently won the respect of his peers. Most of Monument's assets are in the North Sea and as a result it has avoided the problems faced by companies such as Premier in less stable areas. Cairn Energy, meanwhile, has lost momentum but is likely to be a buyer rather than a seller, according to Jon Wright, Merrill Lynch's oil analyst. Last month Cairn suffered a setback in India as an early monsoon delayed work on its Ravva field. "I would like to see Cairn make an acquisition," says Wright. "I would also like to see it diversify away from that region as it has a lot of exposure in Asia." If the winter turns really cold, if Opec nations co-operate more and if the turmoil in the Gulf turns nasty, the oil price could rise and talk of desperate searches for survival will stop. But relying on all three events is too much to ask. So the hunt for marriage partners will continue. In the past the egos of rival chief executives have often stood in the way of agreed deals. But if conditions are bad enough, shareholder-value arguments may prevail.