Small may be beautiful, but the latest financial figures from two petroleum megamajors suggest that biggest is best.
Helped by improved crude oil prices and streamlined businesses, Royal Dutch/Shell and BP Amoco PLC disclosed improvements in third quarter profits of 165% and 72%, respectively, compared with the same period in 1998. Shell's third quarter profit was $2.378 billion, while BP Amoco's was $1.955 billion.
Shell said that the price for prompt Brent crude averaged $20.60/bbl during the quarter, compared with $12.45/bbl in the third quarter of 1998. The price trend was also upwards during the quarter, increasing from about $17/bbl in early July 1999 to more than $23/bbl by the end of September.
John Browne, CEO of BP Amoco, said his company's result "reflects the continuing underlying improvement in our businesses and the stronger crude price, despite the adverse environment in the downstream business, where higher feedstock costs could not be fully passed on to customers."
Payback time
During the recent crude price doldrums, Shell reorganized to slash its costs of doing business, while BP and Amoco merged in pursuit of economies of scale; now these efforts are being repaid.
Meanwhile, Exxon Corp. and Mobil Corp. are awaiting US Federal Trade Commission approval for a merger that will put them at the head of a group of three companies that dwarf all of the competition (OGJ, Oct. 25, 1999, p. 22).
The costs of scale achieved by Shell, BP Amoco, and soon Exxon Mobil, will surely put their return on capital performance beyond any competitor in the petroleum industry.
A report by the London-based global equities group of Commerzbank AG suggests that, as the oil price recovery continues, the more-attractive exploration and production independents will be mopped up by cash-rich majors.
Independents cheap
Commerzbank said that E&P independents are now, more than ever, small players in a game for giants and are likely to fall behind in terms of unit costs and return on capital.
"E&P [firms] will get better," said Commerzbank, "but the integrated companies will improve more quickly, having just been through the largest phase of consolidation in their history. The E&Ps had this chance but spurned it."
The analyst said that, for investors, the only way to have made money historically from E&P companies has been to invest 1 year after the bottom of an oil price cycle and to sell out 1-2 years later.
"Nine months on from $10/bbl oil," said Commerzbank, "we are approaching the first step. The companies are not yet competitive, but their shares are cheap. Some are very cheap. As in the past, the elements are in place for corporate activity. We confidently predict cash bids."
Potential bidders for E&P companies are thought to include Italy's Ente Nazionale Idrocarburi and the US majors that suddenly became dwarfed by the BP-Amoco and Exxon-Mobil mergers.
And the likely targets? Commerzbank reckons at least two of four UK independents-London's Enterprise Oil PLC, Lasmo PLC, and British-Borneo Petroleum Syndicate PLC, and Edinburgh's Cairn Energy PLC-will be bid for "in the next 12 months."