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Big groups draw back from grand gestures

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By Carola Hoyos in London and Sheila McNulty in Houston

Published: October 22 2008 22:59 | Last updated: October 22 2008 22:59

Tony Hayward, BP’s chief executive, was recently compelled to reassure investors that his company’s dividend programme was sound.

He is not alone. Rex Tillerson, chief executive of ExxonMobil, which has increased its dividend for more than 20 years, this week also had to answer questions about where he planned to cut expenditure.

Investors’ need for reassurance comes as oil prices have fallen by half and the shares of even the biggest, most robust international oil companies have taken a beating.

Mr Tillerson said Exxon’s five-year $125bn capital expenditure programme had not been changed. But, despite the company having more than $40bn in cash and almost no debt, thanks to a record run of oil prices, even he had to admit: “I think it’s a little early to tell what effect oil prices will have. We have to wait and see till the dust settles.”

Big international oil companies with their strong balance sheets are clearly far better placed than smaller counterparts. Analysts believe their dividend programmes will be one of the last areas to see any cuts, with buybacks and even capital expenditure first to suffer.

Bob Gillon, at JS Herold, said: “The world has moved very much in favour of the big oil companies, most especially ExxonMobil with its capital discipline.”

He even argued that the stock market plunge might yet provide a massive buying opportunity.

“It has opened up a wealth of opportunities that were not available recently,” Mr Gillon said.

The stalling of credit and the drop in share prices may at last provide companies such as BP, ExxonMobil and Royal Dutch Shell with a way to boost their shrinking production by snapping up assets of overleveraged explorers. They have also been coveting the assets of bigger companies such as BG, with its strong growth portfolio.

Of the biggest oil groups – which as a group trade at only 4-5 times earnings because of their inability to grow – Eni, StatoilHydro and BP face the toughest struggle to grow beyond 2015, said Neil McMahon, analyst at Sanford Bernstein.

PetroChina, Asia’s biggest oil producer, has an asset-to-liability ratio of less than 30 per cent compared with the 60 per cent level of BP and Shell, Jiang Jiemin, its chairman, said this week.

“We are studying the operational status of some international resources companies including energy companies in the capital market and we will not give up any opportunity if any arises,’’ he said.

The chief executive of one big European oil company recently even mused about the possibility of consolid ation within continental Europe’s biggest operators such as EniTotal and Shell.

The idea is still widely seen as far-fetched because companies would be unwise to draw down their cash during an intense credit squeeze.

Becoming bigger makes finding enough new reserves to replace those used up each year even more difficult, and government and regulatory bodies are likely to object to such large tie-ups. But one consultant warned that chief executives often felt compelled to make such grand gestures in times of profound change in spite of the questionable econ omics.

Priscilla McLeroy, director and managing partner of Arthur D Little’s energy and chemicals practices in North America, believes any M&A activity will be cautious.

“The opportunity is there but everybody has the same opportunity,” she said.

In the US specifically, she said, the big groups were very strong. Some smaller companies, about the size of Chesapeake or XTO, were ripe for consolidation before the crisis struck, and a big oil company might now look at their assets as attractive.

Any deals could be slow in coming as stalemates develop, with sellers looking to past high prices while buyers emphasising how much further oil and share prices could still fall, bankers said.

With all Big Oil’s advantages, analysts at Sanford Bernstein still warned in a recent note that, while “outperforming in a bull market for energy was relatively simple, steering a company to financial health through a credit crunch and a serious correction in oil and gas prices is a far greater test of the prudence and strategy of management teams”.


In depth: Oil – Sep-15

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