Oil companies are fighting to increase profitability in an industry characterized by massive consolidations, environmental pressures, and "price whiplash," says Williams Marko, a principal at Navigant Consulting, Houston.
Addressing a Society of Petroleum Engineers luncheon in Houston Jan. 13, Marko listed the factors that he believes correlate directly with improved financial performance. For major oil companies, these are size, business diversity, involvement in the consolidation trend, and low levels of debt. For independents, they are size, diversity, and "oiliness."
"In 1999, 'oiliness' was good," said Marko. "This is not surprising, given the oil price rise."
Marko analyzed 1999 shareholder returns for the two groups. Half the group of majors beat the S&P 1-year return of 19%, he said. The independents, on the other hand, were all over the map. There is much more volatility in the performance of these companies-twice that of the majors, says Marko.
The big players will have big advantages going forward, says Marko, because they can afford to go anywhere when an opportunity arises-off West Africa or Eastern Canada, or in the Middle East, for example.
The merger trend would certainly indicate that the "bigger is better" philosophy is becoming commonplace.
Almost every one of the 30 largest oil companies has been involved, says Marko. And the majors are looking more and more like the national oil companies these days, he added.
The trend started as a response to low oil pries and rising environmental pressures, he says. Environmental matters have not been commonly cited as an incentive for mergers and acquisitions, but Marko noted that the former British Petroleum Co. PLC lightened its reserves mix considerably when it acquired Amoco Corp. Similar differences in reserve mixes can be seen in the Exxon Corp.-Mobil Corp. and TotalFina-Elf Aquitaine combines.
Industry mergers have also been used as a means of improving cost structures, notes Marko. "The E&P food chain makes the E&P business more efficient," he said.
Going forward, says Marko, the mid-sized companies (those with a market capitalization of $10-20 billion) have a lot of pressure on them to compete with the majors. But change creates opportunities.
"The mid-size companies need to be large or nimble," Marko noted.
"Nobody believes [the current price uptick] will last or knows how long it will last," said Marko. So companies will continue to strive to find innovative ways to break through the cost floor.
He cited BP Amoco PLC's recent outsourcing agreements with PriceWaterhouseCoopers as an example of inventive cost reduction. BP Amoco signed a contract worth $1.1 billion to expand its business process outsourcing agreement with PWC to the US for a 10-year period. A subsequent $200 million (US) agreement extended the relationship to include Canada. The deals include finance, administration, and information technology services.
To illustrate the magnitude of the value yet to be uncovered in the petroleum industry, Marko analyzed company performances in terms of finding and development costs, operating costs, and general and administrative costs per barrel of oil equivalent produced.
What he found was that, if the top 25 companies with costs greater than the median level were to improve their performance up to the median point, this would create $23-31 billion in additional value for the group. "That means there's a lot more value to be had," said Marko.
