By OGJ editors
HOUSTON, June 21 -- Independent oil companies will lead a strong rebound in energy industry mergers and acquisitions during the second half of this year as major international oil companies devote cash to stock buybacks and dividend payments, said an analyst in PricewaterhouseCoopers LLP's Transaction Services group.
"While the majors sit on their cash, the big independents are looking to replenish reserves through acquisitions," said Rick Roberge, US leader of the Transaction Services group's Houston-based energy practice.
"Despite the fact it costs $8.50-9/bbl to buy reserves on Wall Street through acquisitions, finding and development costs are running in excess of $10/bbl," he said in a press statement. "For companies eager to replenish their reserves, that's an attractive equation."
With the crude price above $40/bbl for the past year, global demand still is growing, particularly in China and India. So it's difficult to make a convincing scenario for lower commodity prices, Roberge claimed.
For future additions to reserves, many major oil and gas companies are pursuing large international projects that often take 3-5 years to complete and require production-sharing arrangements with national oil companies.
M&A is a more appealing route to growth for many independent producers unable to participate in big investment projects or lacking large prospect inventories, he said.
The conservative majors now are spending less on investment and M&A than in previous periods of high commodity prices. Except for Chevron's acquisition of Unocal, Roberge said, the majors have avoided big acquisitions and continued to use their cash flow for stock buybacks and to pay dividends.
"While that's won them points on Wall Street, they can't delay replacing reserves indefinitely," he said. "An internal shift in project economics from $20/bbl to closer to $30/bbl would increase investment and put more projects on the table, particularly with national oil companies," the analyst said. "Until then, look for more buybacks and dividend payouts."
Meanwhile, independents are looking to buy.
"While some of the super-independents have told Wall Street they're also going to remain conservative, bankers are making lists of possible buyers and sellers in the segment. Because sellers can get the best price now and buyers need to grow, activity will heat up," Roberge said.
Gas M&A
The natural gas industry remains ripe for M&A.
"Look for more acquisitions in this sector, given tight supply and prices exceeding the $6[/Mcf] level," Roberge said. "Excluding the Unocal deal, some 60% of M&A in North America over the last 2 years was natural gas-focused. With major LNG projects still years away, Alaskan gas pipelines nowhere near done, and big production declines in the Gulf of Mexico, natural gas will continue to be an important part of the M&A story going forward."
Roberge said, "The only wild card in this scenario is a major drop in the price of oil, but that just doesn't seem to be in the cards, certainly for the balance of 2005. Some of the majors may still assume that $25[/bbl] is the midcycle price, but what could create that price? A significant unexpected drop in Chinese demand? A dramatic increase in near-term reserves? Substantial production quota increases from OPEC? Less political risk in major oil-producing countries like Nigeria, Venezuela, or Saudi Arabia? It just doesn't seem likely."
