Summary
RIGZONE news reported on an article by James Herron of Dow Jones Newswires on December 3. Mr. Herron said that funding for small to medium-sized oil companies will be scarce in 2009. When capital becomes available, it will be expensive. Michael Powell of Barclays Capital confirmed this opinion. Simon Ashby-Rudd at Tristone Capital said that investor shrink from financing risk He cited the case of Oilexco, a Canadian North Sea operator whose share price has recently plummeted. Bankers said they expected acquisitions to increase next year. The oil majors have plenty of cash. Several large private equity firms have over $250 million to invest. An oil asset bought today will be a money maker in three to five years. But potential buyers are cautious because of the uncertainty of value. Financing has now become a strategic issue. No company will make an acquisition if it will jeopardize their balance sheet in a short period of time. Total SA recently decided not to bid for Nexen Inc.
Analysis
When the price of crude oil reaches low levels, small oil companies that only produce are at a disadvantage. Their share prices reflect the price of crude oil. Major oil companies with extensive refining networks and retail outlets are in a more favorable position. Exxon Mobil, Chevron, Royal Dutch Shell, Total and ConocoPhillips refine and market considerably more than they produce. They are crude oil buyers in both high and low oil price environments. Today, Exxon Mobil can buy oil on the open market at prices much close to the cost of equity oil than was possible three months ago. Many major oil companies were poised to make acquisitions four years ago but the rapid escalation of crude oil prices made such moves risky. Now that prices have dropped sharply and small oil company stock prices with them, the game has changed. Now is the time to buy good, solid, reserves in the ground. So the majors will analyze each of the several small to medium-sized companies whose asset bases are complementary to their own. Any middle-sized producer with an offshore West African portfolio of properties in Angola, Nigeria, Gabon or Congo will come under scrutiny. Similarly, U.S. smaller companies with substantial low-lifting cost reserves in the Permian basin will be of interest to larger companies with strong balance sheets. But most of the shale gas producers will be under pressure for all of 2009. Many of them carry relatively high debt loads. With natural gas prices ranging from $ 5.75 to$ 6.50/million btus, payouts for high-decline rate gas wells are longer and rates of return substantially lower. This segment of the industry will likely see a consolidation of the smaller operators. Are mega-mergers possible? They should not be ruled out. No one ever thought that Chevron would buy Gulf Oil Corporation. The merger of Exxon and Mobil seemed unlikely as did that of BP and Amoco. Anything can happen in a low price environment. Watch out for surprises.
