JP Morgan: More oil mergers looming on horizon

March 5, 2001
The global oil and gas industry will see another wave of major mergers within the next 2 years, as the "bigger is better" trend in consolidation continues.

The global oil and gas industry will see another wave of major mergers within the next 2 years, as the "bigger is better" trend in consolidation continues.

That prediction came from Jeremy Wilson, JP Morgan's global head of energy mergers and acquisitions, speaking at the Institute of Petroleum's IP Week late last month in London.

He said there are still "two or three major mergers to be done" in the near future, because global equity markets continue to reward oil companies that have scaled up their market capitalization through acquisition with higher share prices.

"This is a self-evident truth. The equity markets are assigning higher multiples directly correlating to size," he said. "And this relationship is still going strong."

He said European companies such as OMV AG, Veba Oil & Gas GMBH, and Poland's PKN are prime candidates for combination as continental Europe's oil and gas company executives move to create a "regional champion." There remains a question over whether Russian oil companies-"with their built-in cash flows and war chests"-will become involved in the consolidation process, said Wilson.

Merger success to date

He said the success of the BP, TotalFina- Elf SA, and ExxonMobil Corp. mergers will fuel the consolidation trend, because those have "largely made good" on their promises to shareholders of synergies linked to increased profitability, growth through access to upstream areas, and "gap-filling" through acquisitions (see related story, p. 20).

"BP announced synergies of around $2 billion/year," noted Wilson. "So far, it has achieved a little in excess of that; Total[FinaElf] is also well on the way to fulfilling its promise; ExxonMobil, likewise, announced synergies of around $3 billion, and it has been delighted by the cost-cutting in the Exxon and Mobil portfolios-as of today it is expecting synergies from the combination of a little less than $5 billion/year.

"If you add the synergies promised during the last merger wave, the total comes to more than $10 billion/year," he emphasized. "If we take a typical ratio to capitalize the value of those savings, you will get a shareholder value creation in the region of $100 billion."

The cost-cutting achieved by the megamajors via synergies will continue to place extreme pressure on those oil and gas companies that have yet to grow through acquisition. One exception, Wilson points out, is Royal Dutch/Shell Group, which has managed to trim some $4 billion out of its business units-a target revised upward to $5 billion last December-without playing the merger card.

He noted that ENI SPA, Repsol-YPF SA, Conoco Inc., and Phillips Petroleum Co. had all been "widely rumored" as weighing up various corporate combinations, and that "only time will tell whether they can carry on as independent entities or will be forced to merge to gain scale and scope."

Growth achieved through reserves addition-another of the promised immediate benefits of major acquisitions-will prove more difficult to sustain, Wilson said. Megamajors will, on average, have to add 30% to their current reserves base to meet announced targets, with Exxon- Mobil, for one, having to increase its reserves by more than a third by 2004.

The disappearance of many independent oil and gas companies through takeover the last 2 years, such as British-Borneo PLC and Saga Petroleum AS, Wilson believes flags up the reality that "the smaller E&P company is becoming increasingly irrelevant to the larger fund manager. These fund managers have billions of dollars to invest in the equity markets, and they cannot afford to analyze and understand the smaller companies. They have many companies to choose from with market caps of over $2 billion, and for many of the smaller E&P companies, the liquidity is just not there," he said.

"For these independents to continue to be successful going forward, they have to be able to clearly demonstrate a very competitive niche-and a way to beat the megamajors that have scale economies."