Remembering the megamergers

With oil industry attention still fixed daily on stubbornly overheated oil prices-and now the potentially fraught issue of future supply from Iraq-one of the most fundamental changes to the sector in the modern era, namely the sharp trend in mergers and takeovers, has largely fallen out of favor as a regular talking point.

With oil industry attention still fixed daily on stubbornly overheated oil prices-and now the potentially fraught issue of future supply from Iraq-one of the most fundamental changes to the sector in the modern era, namely the sharp trend in mergers and takeovers, has largely fallen out of favor as a regular talking point.

In fact, but for the recently announced marriage of Chevron Corp. and Texaco Inc., the term "consolidation" itself might have slipped back into the corporate legal lexicon.

Yet, as BP Chief Economist Peter Davies pointed out at the Oil & Money conference in London a few weeks ago, until recently, most of the majors had been "intact for the best part of 70 years despite the world changing dramatically."

Today there are two categories of oil company: one made up of the five energy giants, one made up of majors and independents.

The urge to merge

The reasons for this trend are not state secrets. Industry profitability had been in slow decline, as Davies reminds us, for some time, as strategic assets matured, notably upstream. Add to this a cast of "ambitious, adequately financed" new players joining the fray at a time of deregulation, market disintegration, and economic development, and soon "total aspirations exceeded the sum of opportunities." Prices and margins went soft.

Because the cost-cutting philosophies, copper-bottomed balance sheets, and improved asset portfolios of the 1990s didn't finally pass muster, scaling up became the sine qua non of corporate survival.

All this is, of course, well known. More engaging though is Davies's view that while consolidation may be reaching a plateau, the climate of change that catalyzed the trend is not. Self-created market forces and ongoing globalization will see to this over the longer term.

Few assurances

"This is a world of few barriers, transparency, and the wide availability of low-cost information," he stressed. "And in an industry with few barriers to entry, the forces of competition will be strong. Each company will need to generate its own sources of competitive advantage."

Bigger as a synonym for better will be no guarantee of survival. Nor can robust prices and wide margins be counted on.

Still, in the near term, the investment spend-driven by a "growth agenda rather than prices"-will be on the up, "probably by over 20%," says Davies, because of the demand in financial markets that oil companies grow by 7-8%/year.

And then there is the uncharted territory called gas. To say nothing of the added burdens of undisguised environmental, health and safety, and social responsibilities to a daily more elaborate network of stakeholders.

There isn't space here to detail the "dimensions" of the New Oil Company that, to Davies's mind, will mark it for success. Suffice to say the characteristics he lists, if common currency, will combine to form companies for which there is "no single model." A useful reminder, given that the megamergers of the last 2 years still have the "imperative of being completed and implemented fully."

As the year starts to wind down, thoughts often turn to stock-taking-mostly as a means of rewriting past as prologue to the years to come.

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