Lower Oil Prices Enlarge List of Big Oil's Possible Targets

HOUSTON (Dow Jones Newswires), November 11, 2008

As crude-oil prices fall further, the list of beleaguered oil and natural gas companies vulnerable to takeover grows.

The economic downturn and the drastic drop in oil prices, which have fallen from all-time highs above $145 to about $60 a barrel recently, have caused share prices of most energy companies to plunge and forced many to cut capital spending to preserve liquidity. If the drop in commodity prices is sustained, as some expect, several smaller oil and natural gas companies could become prey of hostile buyers. These buyers are likely to be the large, deep-pocketed integrated energy companies.

But although large integrated oil companies such as Exxon Mobil Corp., Chevron Corp. and ConocoPhillips have said they are open to opportunities, they probably won't buy companies or assets just because they look cheap. When it comes to spending their time and money, oil giants are likely to be highly selective, analysts say. This approach could reduce even more the financing options of struggling oil companies.

"I don't expect them [big oil companies] to go willy-nilly and buy just about any company that gets into trouble," said Lysle Brinker, vice president at John S. Herold's Equity Research in Connecticut. "Majors are going to buy the companies or assets that fit into their long-term strategy and fill in various holes they believe they have."

Shares of ExxonMobil closed Monday at $74.02, down 7 cents, while ConocoPhillips' stock lost 65 cents to $50.93. Chevron, however, was up 88 cents at $74.34. Light, sweet crude for December delivery settled $1.37, or 2.2%, higher at $62.41 a barrel on the New York Mercantile Exchange.

Waiting Game  

The Achilles' heel of the major energy companies includes a declining production profile that could lead them to try to enlarge their presence in promising natural gas fields in the U.S. or to acquire companies with large undeveloped oil discoveries in oil-rich areas of Africa.

But these large-cap companies, which have low debt and plenty of cash after years of high oil prices, aren't in a hurry to make deals and some of them, such as ExxonMobil, have such a balanced portfolio that additional acquisitions may not be necessary, Brinker added.

"We have to wait and see," Exxon Mobil Chief Executive Rex Tillerson said in October, referring to the company's approach to mergers and acquisitions. A couple of weeks ago, an ExxonMobil spokesman reaffirmed that the company isn't rushing out to go shopping.

"We are monitoring what's going on in the market," David Rosenthal, ExxonMobil's vice president for investor relations, said during a recent conference call. "But, again, mergers and acquisitions is just one opportunity amongst many that we have."

Some see struggling companies such us U.S. natural gas producers Chesapeake Energy Corp. or Petrohawk Energy Corp. as possible acquisition targets. The market capitalization of these companies has shrunk as they suffer the consequences of having relied extensively on the capital markets to fuel their growth.

In the third quarter, Chesapeake sold stakes in two natural fields to BP PLC for $3.6 billion, and there is speculation that the European oil giant is in talks to acquire more assets.

BP's moves and other acquisitions made by Royal Dutch Shell PLC in Canada were signals that major oil companies were turnings their attention to North America. Although analysts expect more of these deals to happen amid increasing consolidation in the ranks of independent producers, U.S. oil giants are expected to keep watching from the sidelines until they find the right fit, as they have different needs than their European peers.

BP and Shell have less exposure than Chevron or ConocoPhillips to North America, a region that has become attractive for international oil companies in recent years as it offers tax stability and no risk of possible expropriation of assets by governments, said Daniel Katzenberg, energy analyst at Oppenheimer & Co.
'Independent' Motives  
Large, independent producers such as Apache Corp. or Occidental Petroleum Corp. are seen as more likely buyers of small struggling companies. Top executives of both companies have recently said they are looking for acquisition opportunities.

Independent oil companies are non-integrated firms that focus on exploration and production of oil and natural gas, with no marketing or refining operations.

Occidental has been interested in buying some assets from smaller exploration and production firms the last two months, President and Chief Financial Officer Stephen Chazen said at the end of October, but its offers have been rejected because sellers are looking at six-months-ago prices while buyers are looking at currently lower prices.

For that reason, Chazen said, he expects to see asset deals in the energy industry happening next year when cash-poor companies realize energy prices aren't likely to rebound.

For Bob Fryklund, vice president of consultancy IHS, U.S.-based majors could be interested in some domestic natural gas assets but may have a greater interest in independent companies with large undeveloped discoveries outside the U.S. that are also struggling due to the financial crisis. The list of these companies includes Verenex Energy Inc., Tullow Oil PLC and Kosmos Energy.

Canada's Verenex, for example, has announced 11 oil and gas discoveries in the Ghadames Basin in Libya since 2006, but, due to the credit crunch, it has already announced it will open a data room for prospective buyers.

"In a world where super majors have trouble replacing reserves, Verenex has an interesting opportunity to consider," said Richard Wyman, analyst at Canaccord Adams.

London's Tullow Oil, along with Heritage Oil Corp., announced in October a significant new discovery in Uganda, while Dallas-based Kosmos Energy also has two major oil discoveries offshore West Africa.

Copyright (c) 2008 Dow Jones & Company, Inc.

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