Oil Slump Sets Scene For Mergers

   (FROM THE WALL STREET JOURNAL 1/29/16) 
   By Bradley Olson and Sarah Kent

Here's how bad things are getting in the oil patch: In some cases it is now cheaper for energy companies to buy one another rather than drill for crude.

A year-and-a-half on from the start of the worst crude-oil-price crash in a generation, the biggest U.S. and European energy companies have delayed projects and made such deep budget cuts that they will soon struggle to replace the oil they pump out of the ground with new reserves. That conundrum could have serious implications for Exxon Mobil Corp., BP PLC, Chevron Corp. and Royal Dutch Shell PLC because oil-and-gas reserves are critical to evaluating their growth prospects.

Exxon and its peers are set to begin reporting fourth-quarter earnings this week, starting with Chevron on Friday. Analysts estimate combined profits at the four biggest publicly traded Western oil companies will be about $22 billion, the weakest results since 1998,according to S&P Capital IQ. Shell, Chevron, Exxon and BP declined to comment.

Facing poor returns for drilling and severe challenges to long-term growth, some big oil companies have little choice but to turn to deals, said Anish Kapadia, an energy analyst at Tudor Pickering Holt & Co.

"The obvious conclusion is to go out and buy something," he said. "The valuations are getting quite attractive."

Past energy downturns drove many of the biggest oil companies to strike deals, with big companies buying smaller rivals such as Anadarko Petroleum Corp.'s takeover of Union Pacific Resources in 2000. Equally matched energy conglomerates also lashed themselves together the last time oil traded around $20 a barrel in the late 1990s, including Exxon's tie-up with Mobil and Chevron's with Texaco.

"If prices stay this low, we're going to see much more distressed companies and that will drive M&A," said Luke Parker, research director at Wood Mackenzie.

Bankers and analysts have been predicting a wave of deals almost since crude prices began to fall from over $100 a barrel in the summer of 2014, but they never materialized. Last year was the slowest year for oil-and-gas transactions in over a decade, according to Wood Mackenzie.

The only sizable acquisition by a big energy company so far is Shell's $50 billion purchase of BG Group PLC, which Shell and BG shareholders approved this week and is expected to close in February.

Many U.S. oil producers that tap shale formations have fought for a year to avoid a sale, including Apache Corp. -- which fended off an overture by Anadarko last fall -- and Whiting Petroleum Corp., once the biggest producer in North Dakota's Bakken Shale, which entertained offers last year before turning to Wall Street for more debt and equity. Just as potential sellers were reluctant to accept offers they considered too low as they hoped for a rebound in oil prices, many potential buyers were also put off by the extreme volatility in oil prices and wondered if any deal struck would look expensive if crude fell ever further.

Both impediments are gone, now that hopes for a quick rebound have been dashed.

At current prices, U.S. shale producers are losing more than $2 billion a week, according to consulting firm AlixPartners LLP. That means as oil's crash grinds on, some shale companies may be forced to fall into the arms of a willing buyer this year.

Oil-patch deals now look more attractive than they have in years, said Robin Bertram, the oil-and-gas resource evaluation leader at Deloitte LLP. That is especially true for some of the biggest oil companies, which sat on the sidelines during the U.S. shale boom.

(END) Dow Jones Newswires

January 29, 2016 02:47 ET (07:47 GMT)

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