Cash-Rich Oil Firms Snap Up Assets

NEW YORK (The Wall Street Journal via Dow Jones Newswires), September 26, 2008

The turmoil on Wall Street is reshaping the U.S. oil industry, forcing debt-laden smaller producers to sell assets and creating opportunities for larger, cash-rich companies that until recently had been criticized by investors for spending too conservatively.

The latest example: Occidental Petroleum Corp., one of the largest independent oil producers, Thursday snapped up the 50% interest it didn't already own in oil and gas fields in Texas and the Rocky Mountains from smaller company Plains Exploration & Production Co. The $1.25 billion price tag was nearly 20% less than the $1.55 billion Occidental paid less than a year ago for the first half of the assets.

The deal comes amid a rapid reversal of fortunes for many in the energy sector. In the first half of the year, energy prices skyrocketed and investors eagerly lent money to oil companies, one of the few industries still thriving in the struggling economy.

Wall Street rewarded companies that spent aggressively on finding and drilling new wells, such as natural-gas producer Chesapeake Energy Corp., shares of which soared 77% this year, peaking July 2 with a closing price of $69.40.

Companies that spent conservatively and built up cash saw their stock go up far less; Occidental shares rose 15% in the same period, closing at $88.42 on July 2.

Oil prices, though still high by historical standards, have declined more than 25% from their July peak. Natural-gas prices have fallen even more sharply as rising production has led to fears of a looming glut. And many energy companies have seen their share prices plummet 40% or more from their highs in June or July.

The shift has led to a scramble for cash just when the global financial crisis has made it hardest to come by.

Chesapeake, the U.S.'s largest producer of natural gas by output, Monday said it would cut capital spending by $3 billion, or 17%, through 2010. To help fund its drilling program, the company said it will sell $13 billion of assets during that same period.

But experts said the marketplace for oil-and-gas properties may have more sellers than buyers. Even some companies that want to buy are struggling to find the cash for purchases. Wednesday, Dominion Resources Inc. said it was scaling back a sale of drilling rights in Appalachia after its buyer, closely held Antero Resources Corp., had difficulty borrowing the money it would need to drill the wells.

Antero will buy 114,259 acres for $347 million, down from its original plan to purchase rights to 205,000 acres for $552 million. The remaining acres will go back on the market where they will compete with assets being sold by Chesapeake, among others.

"There are a lot of property packages on the market right now," said David Heikkinen, an analyst with energy-focused investment bank Tudor Pickering Holt & Co.

That means buyers can set more aggressive terms. Occidental President and Chief Financial Officer Steve Chazen said his company's deal with Plains began with a phone call from Plains CEO James Flores. "We told them what the price we were willing to pay was, and [Mr. Flores] says, 'Well how about more?' and we say, 'No,'" Mr. Chazen recounted.

Plains representatives couldn't be reached for comment. But in a statement, Mr. Flores said the deal will allow the company to refocus its efforts on assets in the Haynesville Shale, an emerging natural-gas field in Louisiana and Texas where the company bought a 20% stake from Chesapeake earlier this year.

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