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Reuters: More big U.S. energy deals? Don’t hold your breath

Reuters: More big U.S. energy deals? Don’t hold your breath

“The so-called super-majors, such as Exxon Mobil Corp., Chevron, Royal Dutch Shell and BP are already so huge that any attempts to buy smaller integrated companies, such as Marathon Oil Corp , or Amerada Hess Corp , would inevitably run into anti-trust problems…”:

Tuesday 23 August 2005

NEW YORK, (Reuters) – At first glance, the U.S. energy sector seems ripe for consolidation: Record prices have added to cash holdings, production has been slumping, and Asia’s giant economies are hungry for energy assets.

But do not hold your breath for the next blockbuster energy deal on the heels of the $18 billion Unocal Corp. acquisition by Chevron Corp. last week after a bitter takeover battle, say some industry insiders.

With its strategic assets in Southeast Asia and a poor track record of delivering returns to shareholders, Unocal was a unique takeover target and few similar candidates are left.

“Those companies that have done a poor job of managing results are natural candidates for consolidation,” Occidental Petroleum Corp. Chief Financial Officer Steve Chazen said in an interview in Los Angeles last week. “Unocal was a failed company with terrible management.”

Chazen also discounts the popular notion that Chinese and Indian oil companies are on a rampage in the quest for long- term energy security for their rapidly growing economies. “A lot of it is talk,” he said.

Instead, he believes any consolidation will come from Western majors wondering what to do with with the excess cash they will have if oil prices stay at record highs.

As for Occidental, Chazen says no one has approached the company about a takeover, despite being touted as an attractive takeover candidate.

At any rate, with a market capitalization of over $31 billion thanks to soaring energy prices and the company’s successful re-entry into Libya, Occidental will not come cheap.

WHO’S LEFT REALLY?

Others like A.G. Edwards oil analyst Bruce Lanni do not think the top Western majors will have much luck either in finding acquisitions in the U.S. energy sector.

The so-called super-majors, such as Exxon Mobil Corp., Chevron, Royal Dutch Shell and BP are already so huge that any attempts to buy smaller integrated companies, such as Marathon Oil Corp , or Amerada Hess Corp , would inevitably run into anti-trust problems, he said.

Integrated companies have both production and refining operations, unlike independent producers that focus solely on exploration and production.

As for the smaller independent U.S. oil producers, such as Burlington Resources Inc , Apache Corp. or Anadarko Petroleum Corp. many of them have been picking up assets in the United States that the majors have been shedding, making it pointless for the majors to go back and acquire them, Lanni said.

With the integrated companies feeling a pinch from lower production, many believe they will start buying the independents, Merrill Lynch said in a research note on Friday. But that may be a smoke screen.

“Integrateds don’t want labor intensive assets,” Merrill oil analyst John Herrlin wrote. “Mergers and acquisitions will require lower prices.”

Ultimately, Lanni is betting the independent producers will merge with each other, driven partly by a desire to grow larger in an industry dominated by behemoths such as Exxon, Chevron and ConocoPhillips.

“The competitive landscape has changed. You probably won’t see too many, if any, acquisitions from the integrateds,” Lanni said. “But from the same token, since exploration and production companies are also going to be confronted with growth issues, consolidation between them could potentially be accelerated.”

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