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Analyst Sees Energy M&A Heating Up

JANUARY 22, 2009, 10:24 AM

Consolidation in the oil and gas industries is just around the corner, according to Fadel Gheit, an oil analyst at Oppenheimer.

Oil prices are down more than 70 percent from last summer’s record high. The longer oil prices stay weak, Mr. Gheit said in a note to investors Thursday, the greater the chances of a major merger party in the energy sector.

The last time energy prices collapsed so violently was in 1998, when a barrel of crude traded for as low as $10. The shift caused many oil companies to leap into the arms of rivals and gave rise to the “super major” oil companies: ExxonMobilChevronTexaco,BP Amoco ArcoTotalFinaElf and ConocoPhillips.

“We believe low oil and gas prices are likely to trigger industry consolidation similar to that following the 1998 oil price crash,” Mr. Gheit wrote. “We do not rule out any combination even between major oil companies, after the necessary divestitures to win government approval.”

Merging an oil and gas company could yield major benefits for shareholders, many of whom are nursing losses because of the falling price of oil. “M&A activities can enhance operating and financial results, improve investment returns and boost shareholder value through cost savings from economies of scale and increased efficiency,” Mr. Gheit said.

Mergers in the oil and gas sector are typically very aggressive, with the smaller merger partner often experiencing 50 percent to 100 percent workforce reductions and 30 percent to 60 percent reductions in capital expenditures. The benefits of the merger are generally achieved within three years, Mr. Gheit said.

Take Exxon’s 1998 merger with Mobil. By 2001, the combined company had slashed 80,000 workers, equivalent to the entire workforce at Mobil when it was acquired. Meanwhile, the company’s return on capital employed soared to its current industry-leading level of 35 percent.

ExxonMobil may try to repeat that success this year. The Texas energy giant has $38 billion in cash and 2.9 billion treasury shares worth $232 billion, which it has built up over the years buying back its stock. That’s enough currency to buy any of its major rivals, such as Shell or BP, at a 30 percent premium, Mr. Gheit says.

That may not be so far fetched. Rex Tillerson, ExxonMobil’s chief executive, hinted at the company’s annual meeting last April that his company could use its treasury shares to do deals. At the time, oil was about $130 a barrel. If oil stays below $50 a barrel, Mr. Tillerson may be even more interested in reaching into his Texas-sized war chest.

– Cyrus Sanati

New York Times Article

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