Latest Price Jump Discourages Big Oil Mergers

Copyright (c) 2007 Dow Jones & Company, Inc.

Major oil companies are more likely to use the extra revenue from the latest jump in oil prices to continue share repurchases rather than undertake costly acquisitions, analysts said.

Although there have been some larger acquisitions by major oil companies in recent years, companies like ExxonMobil Corp. (XOM) and BP PLC (BP) have generally favored share buybacks, which are popular with investors and boost earnings on a per-share basis. Analysts expect the sector to stick with this preference now that oil is trading above $90 a barrel.

"These are prudent companies that are making strategic decisions based on much lower oil prices," said Ben Tsocanos, an oil and gas analyst at debt rating agency Standard & Poor's. "They tendto take a very long-term view. An acquisition means betting on long-term high commodity prices to meet their return."

ConocoPhillips (COP), the third-largest U.S. oil company by market value, announced in February a $15 billion share repurchase plan. In 2006, ExxonMobil spent $25 billion buying back shares, finishing the year with 5.7 billion of common shares outstanding, 15% fewer shares than four years ago.

The oil giants have also raised capital spending by a substantial margin in recent years. Chevron Corp. (CVX) is expected to spend nearly $20 billion in 2007, up from $7.4 billion in 2003.

"What you will see is the same course of action," said Marshall Adkins, energy analyst at Houston-based Raymond James Financial. "They will continue buying back stock."

Analysts say mergers are more likely if there is a big drop in oil prices. Fadel Gheit, equity analyst at New York-based Oppenheimer & Co., pointed to the 1999 acquisition of Mobil by Exxon as one of several major deals that was precipitated by low prices.

"There is no question that every time there is a sharp correction in oil prices, the market triggers mergers and acquisitions," Gheit said. "It has always been the case."

In recent months, there has been speculation about the possibility of ExxonMobil buying another large oil company, such as Devon Energy Corp. (DVN) or even Chevron, but the companies have declined to comment.

ExxonMobil Chief Executive Rex Tillerson told Dow Jones Newswires earlier this month that any deals would "have to make sense not in today's price environment, but it has to make sense...in future environments."

Speaking on the sidelines of a New Orleans event, Tillerson said the company would forgo mergers until the time is right, "because we can afford to be patient."

Copyright (c) 2007 Dow Jones & Company, Inc.