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THE WALL STREET JOURNAL: $100 a Barrel: No Gusher for Big-Oil M&A

January 2, 2008, 4:57 pm
Posted by Dana Cimilluca

Expecting $100 oil to embolden energy titans to embark on a new round of consolidation? Don’t hold your breath.

Unlike, say the technology or telecommunications industries, soaring demand for their offerings doesn’t tend to lead to merger-and-acquisition activity among energy-industry giants. We are talking about so-called integrated exploration, production and refining companies such as Exxon Mobil, Chevron, Royal Dutch Shell and BP. That is because these companies like to follow the old Wall Street mantra when it comes to M&A: buy low and sell high.

The fear these companies have is that if they buy a rival now, the purchase could end up backfiring if oil prices soon descend from their lofty levels. ConocoPhillips’ roughly $35 billion purchase of natural-gas producer Burlington Resources announced at the end of 2005 serves as a cautionary tale. Natural-gas prices have fallen by nearly half since then and trade today at just under $8 per million British thermal units. (That hasn’t stopped shares of ConocoPhillips, like the other big oil-and-gas companies, from performing quite well the past few years.)

Instead, companies like Exxon prefer to use the massive cash bundles they have built up on their own shares. Exxon is spending about $7 billion a quarter on share buybacks, a clip it has maintained for several years.

What is more likely to get these companies in a buying mood is oil prices returning to the tank. The last big surge in industry M&A activity came around the turn of the century, with oil at $20 to $30 a barrel. Think Exxon’s marriage with Mobil in 1999 and Chevron-Texaco two years later.

All this doesn’t mean energy bankers won’t have anything to do in 2008. There has been a surge of oilfield-services deals lately, like National Oilwell Varco agreeing to acquire Grant Prideco and Transocean gobbling up GlobalSantaFe for $17.3 billion. A shortage of drilling rigs and other specialized equipment means demand for these companies’ wares will be guaranteed for years to come, and stokes their appetites for deals that will boost capacity. The total value of such deals surged to $45.5 billion in the U.S. last year, the biggest since at least 1995, according to Dealogic. Merger activity among exploration companies, meanwhile, totaled $23.8 billion last year, the lowest in four years, according to the data.

M&A also may hold some appeal for smaller energy-exploration companies like Delta Petroleum that have heavy capital-spending needs (drilling is expensive) and are feeling the credit crunch in the form of higher financing costs. Just this week, for instance, Delta Petroleum agreed to sell a 35% stake to Kirk Kerkorian’s Tracinda for $684 million.

Such deals aren’t insignificant, but they aren’t $75 billion tie-ups like the Exxon-Mobil merger. With oil prices showing few signs of flagging, perhaps those types of megadeals may have to wait for the next turn of the century.

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