Oil's Move Could Fuel E&P Deals

NEW YORK (Dow Jones Newswires), May 27, 2009

With crude oil trading above $60 a barrel for the first time since November, the oil exploration and production sector looks ripe for a new wave of mergers and acquisitions.

Concerns about the health of the global economy have damped major deal-making in the space so far this year, despite overall low leverage and reasonable valuations. But signs of life are already beginning to emerge, with the close last week of Premier Oil PLC's (PMO.LN) $500 million acquisition of Oilexco North Sea Ltd.

The balance sheets of the major industry players suggest an opportunity for more and bigger deals to come.

The cash ratio - cash in excess of short-term liabilities -- is a good measure of a company's liquidity, and therefore buying power. BP PLC (BP) has a cash ratio of 23.9x, Chevron Corp.'s (CVX) stands at 29.9x and Exxon Mobil Corp.'s (XOM) is a whopping 65.2x, according to FactSet.

BP is always on the lookout for attractive assets. "The future has not been cancelled -- merely delayed," Chief Executive Tony Hayward said at BP's strategy presentation in March.

When looking to spend extra cash, potential buyers will focus on their targets' "break-even price," or the cost to extract one barrel of oil.

Break-even prices vary by region, but the average break-even price for the Organization of the Petroleum Exporting Countries is around $58 a barrel -- making $62 oil a profitable proposition.

Wary of the near-term fundamentals for crude oil, companies may decide to hedge against a decline in price and wait for equity valuations to decrease before taking on an acquisition.

Producers can usually hedge their exposures to underlying energy prices, but this year some companies were left in a predicament. Prices were attractive to would-be hedgers, but many producers hedged at higher prices in 2008 and had no remaining credit to add to their positions. Some of these hedges may be unwinding and could put downward pressure on longer-dated crude contracts.

The improved macroeconomic backdrop should also improve the M&A outlook.

The oil and gas sector has accessed the debt markets to the tune of $52.6 billion since the start of the year, relatively high considering all of 2008 saw around $70 billion capital raised in the debt market. Meanwhile, equity prices in the sector have rallied some 25% from their March lows, and crude is up nearly 70% since hitting a low of $36.51 a barrel earlier in the year.

So where are the deals?

A historical perspective provides some context. A host of deals followed crude's pullback in the early 1980s. E.I. duPont de Nemours & Co. (DD) bought Conoco Inc. in 1981, Standard Oil Co. of California acquired Gulf Oil Corp. in 1984, and BP America bought Standard Oil Co. in 1987. The parallels with the economic backdrop then and now are similar. In 1982, unemployment hit 10.82%, GDP was at -6.4% and oil was down nearly 30% from its then-peak.

Frank Verducci, a director at BP, said he expects that "We are going to see a lot of the super majors make some serious strategic decisions" about U.S. acquisitions.

Anadarko Petroleum Corp. (APC), Marathon Oil Corp. (MRO) and Hess Corp. (HES) are oft mentioned as takeover candidates. While their valuations have risen, they remain compelling. Anadarko trades at 6.78x total enterprise value to forward earnings before interest, taxes, depreciation and amortization. Marathon Oil stands at 4.18x, and Hess trades at 8.14x. The industry average is 7.34x.

The cash-flush majors are in good position to pounce on opportunities such as these.  

Copyright (c) 2009 Dow Jones & Company, Inc.


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

Company: BP plc more info
Operates 27 Offshore Rigs
 - BP Midstream Partners Seeks To Raise Up To $893MM In IPO (Oct 16)
 - BP, Azerbaijan's SOCAR To Sign Caspian Sea Exploration Deal In 2017 (Oct 12)
 - Increasing the World's Oil Reserves with Digitization (Oct 09)
Company: Exxon Mobil Corporation more info
Operates 13 Offshore Rigs
 - ExxonMobil Says Julia, Hadrian South Operations Back To Normal After Nate (Oct 10)
 - Iraq's Talks with Exxon on Southern Oilfields in Final Stages-Minister (Oct 09)
 - U.S. Gulf Oil Producers Start Evacuating Staff Ahead of Tropical Storm Nate (Oct 05)
Company: Anadarko Petroleum more info
 - No More Free Lunch Is the Big Change Under Way in the Oil Market (Oct 09)
 - Anadarko To Spend $2.5B On Massive Share Buyback (Sep 20)
 - Harvey Could Become First Hurricane to Strike Texas Since 2008 (Aug 23)
Company: Marathon Oil Company more info
Operates 4 Offshore Rigs
 - Harvey's Wake Tempers Bullish Outlook for US Oil Output Growth (Sep 01)
 - RoyalGate to Drill New Well in Equatorial Guinea's Block Z (Sep 25)
 - ShaMaran Subsidiary to Contest TAQA Default Notice (Sep 21)
Company: Chevron Corporation more info
 - Canada's Keyera Signs Pact With Chevron To Transport, Store NGL (Oct 10)
 - Chevron Starts LNG Output at Australia's Wheatstone (Oct 09)
 - Petrofac Extends North Sea Contract with Chevron (Oct 05)
Company: Hess Corporation more info
Operates 4 Offshore Rigs
 - Hess: World Needs New Offshore Oil Investments to Avoid Shortages (Sep 28)
 - Hess Slashes 2017 Capital Budget After Quarterly Loss (Jul 26)
 - Suriname Signs Offshore Oil Deals with Exxon, Hess and Statoil (Jul 14)
Company: Premier Oil more info
Operates 3 Offshore Rigs
 - European Oil Producers' Weak Hedging Shows Bet on Price Rebound (Jul 31)
 - Mexico Oil Privatization Pays Off With Billion-Barrel Find (Jul 12)
 - Premier Oil Expects Weak Pound To Help Bottom Line (Jan 12)
Company: Oilexco more info
 - Flexlife Completes Major Projects Using New Scanning Technology (Sep 15)
 - Oilexco Files Eighth Default Status Report (Jul 21)
 - Oil's Move Could Fuel E&P Deals (May 27)