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Consolidation in oil industry likely in 2009

The Associated Press

HOUSTON — Big Oil is set to spend billions on new exploration in 2009, but in addition to surveying ocean beds thousands of feet below the water’s surface, major producers are surveying the balance sheets of vulnerable companies in the sector.

Major oil companies are sitting on enormous piles of cash after posting record profits in recent quarters, while crumbling stock and crude prices have made many smaller oil and gas companies potential targets.

Exxon Mobil Corp., BP Plc. and other oil giants are having increasing trouble securing new sources of fossil fuels the old-fashioned way — exploring and drilling.

Smaller producers that lack huge capital reserves have been stung by a credit crisis that’s severely limited or even paralyzed their ability to finance new exploration and production.

“You have a lot of smaller producers with a lot of property, but many are constrained right now,” said Brian Youngberg, an energy analyst at Edward Jones. “Then you have the major integrated companies with deep pockets that could potentially buy these reserves at relatively attractive prices. You’re probably going to see this happen as we move through 2009.”

What it means

In the long run, consumers could benefit if the deep-pocketed majors finish some projects that might otherwise go undeveloped by smaller, struggling producers. Increased production puts downward pressure on prices.

No one predicts a repeat of the megadeals of the late 1990s, when oil fell to nearly $10 a barrel and the couplings included Exxon and Mobil and BP and Amoco, creating today’s behemoths. But observers say consolidation is inevitable given the enormous stockpiles of capital at the ready paired with the bargain prices for some companies.

Exxon Mobil, the world’s largest publicly traded oil company, said recently that it has $37 billion in cash.

At the same time, the economic downturn and a significant drop in commodity prices have erased huge chunks of market value for other energy companies, including independent oil and natural gas producers with rights to potentially oil-rich tracts of land and sea.

What’s happening

Independents concentrate solely on exploration and production, forgoing refining and marketing operations. Among those mentioned by analysts as possibly appealing to larger rivals are Apache Corp., Devon Energy Corp. and Chesapeake Energy Corp.

Chesapeake, the largest U.S. natural gas producer, has been rumored as a takeover target of BP — speculation possibly fueled by BP taking an interest in certain Chesapeake ventures in the past few months.

BP, Europe’s second-largest oil company, said in September that its U.S. arm plans to buy a 25 percent stake in Chesapeake’s Fayetteville Shale assets in Arkansas for $1.9 billion. A month earlier, BP said it had bought similar Chesapeake assets in Oklahoma for $1.7 billion.

In the past week, Chesapeake sold even more natural gas assets to Norwegian energy company StatoilHydro for $3.38 billion.

Chesapeake shares have fallen roughly 60 percent in the past six months, and in October, billionaire Chief Executive Aubrey McClendon said he sold “substantially all” of his stock in the company to meet margin loan calls.

“It may come to the point where some of these bigger companies decide they’d rather buy the whole company,” Youngberg said.

What’s at stake

In the past, Big Oil has shown restraint on potential buying sprees, even when flush with cash.

Exxon, BP, Chevron, Shell and ConocoPhillips plowed about 55 percent of the cash they made from their businesses into stock buybacks and dividends last year, according to Rice University’s James A. Baker III Institute for Public Policy.

The percentage they’ve spent on acquisitions, meanwhile, has remained in the low-single digits for the past several years.

And the industry’s integrated giants aren’t the only ones looking for bargains that might complement their operations.

Large independent Occidental Petroleum Co. has acknowledged that it’s been shopping in the past couple of months — and even made offers — but has struck no deals.

In a conference call with analysts Oct. 28, Occidental Chief Financial Officer Steve Chazen said deals have fallen through in part because targeted companies want offers based on stock prices of six months ago, not current values.

That tactic may change if the energy slump lingers into next year — when times may really get tough for some in the industry, Chazen said.

Jed Shreve, a principal for Deloitte Financial Advisory Services L.L.P., which advises energy clients, said in a recent webcast that with as many as 10,000 companies in the U.S. alone, the oil patch is well placed for more consolidation.

It’s “a very diverse group of companies,” he said.


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