THE WALL STREET JOURNAL

Oil-Industry Competition Could Shrink

Economic Crisis, Falling Crude Prices Spur 
Big Firms to Consider Consolidating in North America

By RUSSELL GOLD and BEN CASSELMAN

The Wall Street credit crisis and a drop in energy prices from their recent highs are setting the stage for a wave of oil-industry consolidation.

Current market conditions could reshuffle the industry because they are helping some oil and natural-gas companies and hurting others. Large, global oil companies have amassed plenty of financial clout but need to continue growing, and they now sense a buying opportunity. Smaller, mostly North American producers have lots of drillable land but need access to debt and equity markets to grow.

If this smaller group faces a rising cost of borrowing, it could mean more companies putting themselves or key assets on the market.

“I think we’ll find the smaller, cash-constrained companies start to consider very seriously those alternatives, which for the larger firms with better balance sheets presents a great, great buying opportunity,” said Dan McSpirit, an energy analyst with BMO Capital Markets.

Energy executives and bankers say they see the emerging outlines of a buyers’ market for the first time since before the commodity boom of the past few years. The buyers are expected to be large, well-financed energy companies such as European majors Royal Dutch Shell PLC and BP PLC, U.S. majors such as Exxon Mobil Corp. or large conservative energy producers such as Devon Energy Corp. or Occidental Petroleum Corp.

“These guys have been waiting for this correction in the market to build up their longer-term inventory of growth. They have not been growing by the drill bit,” says Thomas Ebbern, managing director of investment banking for Tristone Capital Inc. in Calgary.

Occidental President and Chief Financial Officer Steve Chazen said the Los Angeles company has been paying down debt and amassing cash for exactly this kind of situation. “It provides opportunity in the current environment because people who got extended will have to sell properties,” he says. The company with the greatest financial strength, Exxon, had about $39 billion in cash at the end of last quarter and holds 2.8 billion shares, worth roughly $218 billion, in its treasury.

The big oil companies have had this financial firepower for several years. What has changed is the potential for smaller companies to face distress.

Many companies focused on drilling in North America for natural gas have for years spent more cash than they generate, issuing equity and taking on debt to keep up their torrid pace of drilling. Questions are growing about whether these companies will have to cut capital spending in coming weeks or face a rising cost of borrowing in the face of declining commodity prices.

For some, merely cutting back spending may not be enough. Many smaller companies have bought drilling rights to tens of thousands of acres of land, and now must find the cash to drill hundreds of wells at a time when bank lenders are closing their windows. “Companies have reached beyond their comfort level, and there have to be some consequences,” Jefferies & Co. analyst Subash Chandra said.

Investment bankers are trying to determine which companies might be gobbled up. None have disclosed financial troubles, and experts cautioned not to expect a sudden rush of deals. Companies that have seen their share prices plummet in recent weeks may demand large premiums, believing newly depressed prices don’t represent fair value.

Still, speculation has focused on companies such as Petrohawk Energy Corp., a Houston company with a $5.5 billion market capitalization and an attractive amount of land leased in Louisiana’s Haynesville gas field. Credit Suisse recently pointed out that Petrohawk plans to spend $2.30 this year for each dollar its operations generate at current commodity prices. Its shares were down 1.5% in 4 p.m. trading on the New York Stock Exchange, compared to a 3.6% rise for an index of comparable companies. Another company attracting interest isSouthwestern Energy Co., which has a strong position in an Arkansas gas field.

Even before the current financial crisis, large energy producers had been eyeing the domestic gas assets amassed by the smaller gas producers. The global companies have struggled to find enough new investment opportunities overseas and many have had trouble replenishing their oil and gas reserves.

Write to Russell Gold at [email protected] and Ben Casselman at[email protected]

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