U.K. independents need radical ploy?

The U.K.'s seven remaining sizable independent exploration and production companies will survive the current downturn only by taking radical action. This is the warning of Tim Whittaker, senior analyst in the London office of Commerzbank AG, who says that U.K. independents will struggle if they hold out against consolidation and rationalization. "The sector can be competitive," said Whittaker, "and there can be a brighter future. But that brighter future will only come about through very

Nov. 2, 1998

3 min read

David Knott
London
[email protected]

The U.K.'s seven remaining sizable independent exploration and production companies will survive the current downturn only by taking radical action.

This is the warning of Tim Whittaker, senior analyst in the London office of Commerzbank AG, who says that U.K. independents will struggle if they hold out against consolidation and rationalization.

"The sector can be competitive," said Whittaker, "and there can be a brighter future. But that brighter future will only come about through very radical action, such as the merger of seven companies into one."

The seven companies under Whittaker's microscope were London-based Enterprise Oil plc, Lasmo plc, Premier Oil plc, British-Borneo Petroleum Syndicate plc, Monument Oil & Gas plc, and Hardy Oil & Gas plc, plus Cairn Energy plc, Edinburgh.

Whittaker said merging these firms into one group, which he named U.K. Exploration plc, would generate cost savings of £1 billion ($1.7 billion) over 5 years and boost cash flow by 50%.

Also, debts would be reduced, investment could be funded internally, and a competitive dividend could be paid to shareholders: "Combining into a single entity would give it the critical mass needed to compete globally."

Exposed

Whittaker said the cyclical downturn of the oil industry has laid bare the finances of the seven independents.

"The result of the existing cost structure is deeply uncompetitive financial performance," said Whittaker. "Profitability is well below the industry average; this year it will be 80¢/bbl, compared with $2.30/bbl for the industry.

"Gearing is much too high, at 80% compared with 35% for the industry. Returns on capital are derisory, averaging less than 5% in 1997, which was a good year. Over the same period, the majors delivered around 16% in their upstream businesses."

U.K. Exploration plc

Combining the seven independents would create a truly world-class E&P company, said Whittaker, with competitive assets and sound finances.

"Production from U.K. Exploration plc would rank in the world's top 15 oil companies," said Whittaker. "The same is true for reserves. If current plans are delivered, the new company would be in the top 10 on both measures within 4 years, alongside the likes of (Total and ARCO)."

He described the asset match among the separate companies as "uncanny," with all making material contributions. The combined firm would have 10 world-class assets, each worth more than £500 million ($850 million)

Such a merger could be instigated by two companies merging, say Lasmo and Monument, and bidding for the others. Defense documents would be "flying around like confetti," but the merger logic ought to prevail.

"Unfortunately," said Whittaker, "logic is not always the biggest driver. Egos are too great. The most contentious issue would be who would run the new plc."