Enron, M&A deals shape yearend 2001 Energy 50 rankings

Feb. 11, 2002
The yearend 2001 ranking of the world's 50 largest energy companies was shaped by some significant events:

The yearend 2001 ranking of the world's 50 largest energy companies was shaped by some significant events:

  • Beleaguered Enron Corp. dropped off the Energy 50 list, while other merchant energy firms competed for the Houston-based firm's lost market share.
  • Russian majors posted high returns for 2001.
  • Consolidations continued to reshape the energy industry, although few, if any, rivaled the scale of mergers and acquisitions activity seen in 2000 and years before.

The most recent Energy 50 ranking-a quarterly assessment based on the companies' market capitalization-was released last month by Petroleum Finance Co. (PFC), Washington, DC (see table, p 34).

Click here to view PFC's Energy 50

Enron fallout

Excluding the Sept. 11, 2001, terrorist attacks on the US, the fall of Enron was "undoubtedly the biggest story in the capital markets in 2001 and certainly within the PFC 50," PFC said. "While the industry remains dynamic, the bubble burst in 2001 for the merchant energy companies.

"The impact of Enron's fallout has been extensive, with heightened scrutiny of issues ranging from 401(k) plans to energy deregulation to credit ratings for the energy merchant companies," PFC said.

Another ripple effect caused by Enron, PFC added, is the depleted number of "stellar gas and power performers of 2000 in the [yearend 2001] rankings." According to PFC, Enron "dragged" Houston-based Dynegy Inc. out of the rankings, while energy merchants Calpine Corp., San Jose, Calif.; Mirant Corp., Atlanta; and AES Corp., Arlington, Va., all fell from the list in the third quarter.

"At yearend 2001, the split between oil and gas and gas and power companies in the PFC 50 is now closer to 50/50, compared to the roughly 60/40 gas and power-oil and gas split that prevailed throughout the first three quarters of 2001," PFC said.

"In addition, the share-price momentum that many of [Enron's peers] generated over the past couple of years abruptly went into reverse," PFC noted. As a response, these firms have been making efforts to regain trust from investors, creditors, and rating agencies.

"[Many of these] companies initiated restructuring programs-mainly comprised of capital infusions, reduced capital spending, and asset divestitures. A key driver behind these restructuring steps is the desire to maintain an investment-grade credit rating, a crucial factor in staying competitive in a business highly sensitive to the cost of capitalellipse," PFC said.

Among other firms, PFC said, "three stand out as companies to watch in the scramble to capture part of Enron's former market share: Duke [Energy Corp.], FPL Group, and one other not in the PFC 50, Kinder Morgan [Inc.]."

Top performers

Russian energy majors were among those companies that either entered the Energy 50 rankings for the first time or made steady gains during 2001, PFC said.

"Yukos [Oil Co.] entered the rankings, for the first time, at number 38. [OAO] Gazprom maintained its momentum from the third quarter of 2001 and moved up 6 spots to 35. [OAO] Lukoil and Surgutneftegaz both re-entered the PFC 50, at spots 44 and 33, respectively, after they fell off of the list in the fourth quarter of 2000," PFC noted.

Raleigh, NC-based Progress Energy-a merged entity of Carolina Power & Light, Florida Power Corp., and North Carolina Natural Gas Corp.-was another company that entered the rankings for the first time, although its entry "owes more to others dropping out…rather than any significant market gains," PFC noted.

Among oil service firms, many showed year-on-year declines due to a falloff in rig demand. Quarter-over-quarter, however, many service firms ended the fourth quarter up "significantly" over the third. "Quarter-over-quarter, Transocean Sedco Forex [Inc.] was up 28%, Baker Hughes [Inc.] was up 26%, and Schlumberger [Ltd.] was up 20%," PFC said.

Mergers, acquisitions

Phillips Petroleum Co. and Conoco Inc. were the most active energy firms among the Energy 50 involved in mergers and acquisitions, PFC said. This was exemplified by Phillips's announced acquisition of Old Greenwich, Conn.-based Tosco Corp. in early 2001, a surprising move, particularly after "a stated strategy geared at reducing its downstream exposure," PFC noted.

"The [Tosco] deal gave Phillips some additional capital bulk and attractive assets; however, several questions remained as to the future direction of the company," PFC said.

PFC said the proposed Conoco-Phillips merger "could resolve some of the lingering doubts" linked with the Tosco deal.

"Tosco lacked operational expertise, while its strengths lay in acquisitions and trading. Phillips, on the other hand, possessed technical expertise in refining but lacked experience in running large-scale operations, as well as a questionable commitment to marketing," PFC said, "Conoco could fill these gaps…."

Other notable M&A deals affected Energy 50 rankings:

  • BP PLC purchased a majority stake in Veba Oel AG in a deal arranged as two joint ventures between BP and Veba's owner, E.On AG (OGJ, July 23, 2001, p. 36).
  • Tulsa-based Williams Cos. Inc. eventually outbid Royal Dutch/Shell Group for Barrett Resources Corp., Denver (OGJ, May 14, 2001, p. 38).
  • Shell unit Shell Overseas Holdings Ltd. and Apache Corp., Houston, completed their acquisition of New Zealand firm Fletcher Challenge Energy Ltd., initiated in the fall of 2000 (OGJ Online, Mar. 8, 2001).
  • Duke Energy acquired Westcoast Energy Inc., Vancouver, BC (OGJ, Oct. 1, 2001, p. 36).
  • Dominion Resources Inc., Richmond, Va., acquired Oklahoma City-based Louis Dreyfus Natural Gas (OGJ, Sept. 24, 2001, p. 44).