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FT REPORT – ENERGY: The entire world goes shopping: Speculation persists… merger between BP, Royal Dutch Shell and Total

By Ed Crooks, Financial Times
Published: Jun 19, 2007

In the past year, the energy industry has been going through the biggest merger boom since the wave of consolidation that swept through the major oil companies at the end of the 1990s.

Last year, the total value of deals involving energy companies was $566bn, according to Dealogic, an analysis firm, up from $372bn in 2005.

This year the value of deals is set to be higher still, with announcements for 2007 so far already nearly matching the 2005 total at $356bn.

But while the level of activity is reminiscent of the merger boom that joined Exxon to Mobil, BP to Amoco and Chevron to Texaco around the turn of the decade, the nature of the activity is utterly different.

Three global trends have transformed the merger and acquisition market, and made conditions for the “super-major” oil companies formed by those deals significantly more difficult.

First, there is the rise of the government-controlled national oil companies, many of them from resource-rich states that have profited from soaring prices for oil and gas, which are looking to assert themselves on the world stage.

Second, there is the flood of global liquidity that has created pools of new funds – a significant proportion of which is set to be invested in the energy industry.

Third, there is a new class of hedge funds and activist investors acting as cheerleaders and facilitators for takeovers.

The result is that the western companies that have dominated the M&A scene for decades are finding that there is stiffer competition for assets they would want to buy, and that they themselves may be vulnerable to a bid.

“I don’t think that any company, unless owned by a government, is invulnerable. If it is publicly held, and someone thinks they can make money out of it, it is vulnerable,” says Fiona Paulus, global head of energy and resources at ABN Amro. “The entire world is going shopping.”

National oil and gas companies that are state owned or controlled spent $57bn on acquisitions last year, accounting for a third of the value of all transactions in oil and gas exploration and production worldwide, according to a survey by Harrison Lovegrove, a London-based corporate advisory firm, and John S Herold, a Houston-based research and consulting firm.

Much of the recent activity has been domestic, such as Rosneft’s acquisition of some of the remaining Yukos assets, Gazprom’s acqusition, helped by force majeure from the Russian government, of a controlling stake in Royal Dutch Shell’s Sakhalin 2 project, and the asset deal between China’s Sinopec and China Petrochemical, both state-owned.

But a rising number of the deals are international, such as China’s CNOOC paying $2.7bn to South Atlantic Petroleum for a 45 per cent stake in the Akpo field in Nigeria, and ONGC of India’s $850m purchase of the Colombian assets of Omimex.

Countries that are worried about not having enough oil and gas, such as China and India, are doing overseas deals to secure resources, while companies from resource-rich states are taking advantage of ample liquidity to expand overseas.

“The balance of power has very much shifted to the national oil companies,” says Mark Spelman, energy analyst at Accenture, the professional services group. “I expect we will see the super-majors on the defensive, and more deals being done by the NOCs.”

For the western oil companies, there is a steady process of good husbandry: selling some unattractive assets here, buying some more appealing ones there.

But the transformational deals will be very hard to find. Speculation persists among some combination of merger between BP, Royal Dutch Shell and Total, combined with or separate from demerger of their upstream and downstream businesses. But the arguments that militated against the mooted BP/Shell merger a couple of years ago – the daunting regulatory challenge and the potential clash of personalities – are equally forceful today.

Among downstream companies, including utilities, it is the financial buyers that have generally been more significant than the NOCs.

Petroplus, which was backed by private equity and then floated, has built a business from picking up European refineries that larger companies feel they no longer need.

Colony Capital, the US private equity group, this month agreed to pay the Libyan government €2.6bn for a 65 per cent stake in Tamoil, its European refining and marketing business.

In the US, financial buyers have also pitched into the utility industry. Kohlberg Kravis Roberts and Texas Pacific Group’s $44bn offer for TXU of Texas, cleverly structured and sweetened with concessions to the environment and to consumers, has run into political opposition but apparently remains on course. In spite of the wave of interest from financial buyers in infrastructure assets in Europe, however, there has not yet been a big private equity bid for an energy company.

But the big utility deals, such as the planned bid for Endesa of Spain by Enel of Italy and Acciona, a Spanish construction company, or the acquisition of Scottish Power by Iberdrola, another Spanish electricity company, do have an important financial component.

With plenty of cheap money available, especially for stable utility businesses with predictable returns, investors have been urging companies to gear up to enhance their earnings. None of the possible or actual bidders who have been involved in European deals in the past few years would have had the slightest trouble in raising the tens of billions of pounds they needed.

There are still many unresolved issues in Europe. Will Eon of Germany now focus on organic growth, as it has indicated, after being forced to accept a consolation prize of assets in Spain, Italy and France when it failed to win Endesa? What about RWE, also of Germany, where the chief executive appears to have been forced out in part because he failed to do any big deals? What will happen to the putative merger of Suez with Gaz de France, backed by the previous French administration, now Suez is adding to its stake in Gas Natural of Spain? The answer to some or all of these questions is likely to be further deals.

Perhaps the most momentous development, however, will be when the NOCs from resource-rich countries take their interest in “security of demand” to its logical conclusion, and try to buy consumer-focused companies in the west.

Gazprom has denied it has any interest for the moment in buying Centrica, Britain’s biggest gas supplier. Next year, though, Centrica, or RWE, or some other European company might be a target. That would be the ultimate unignorable demonstration of how much the world order has changed.

 

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