Oil companies join up
In the wake of relatively recent major mergers like ExxonMobil and ChevronTexaco, smaller US oil and natural gas companies feel the need to get bigger in order to compete. For that reason, Kerr-McGee, the US's fifth largest oil and natural gas producer recently agreed to buy rival Westport Resources. The cost of the takeover will be around $2.5 billion worth of stock.
The two companies do most of their work in the US. Kerr-McGee, an energy company with above $4 billion in sales, specializes in offshore wells, especially in the Gulf of Mexico and, to a lesser extent, the North Sea. Westport's resources tend to be on dry land, in South Texas, in Utah, and in Wyoming. (The company had sales over $700 million last year.) One reason for the merger, according to the Wall Street Journal ("Kerr McGee Corp. To Buy Westport for $2.5 Billion", 4/7/2004) is that Kerr-McGee properties are mature and in slow decline, while Westport's reserves are still growing. "In the past four years, Westport has quadrupled its reserves" at a relatively low cost. The acquisition will boost Kerr-McGee reserves by 30%. With natural gas prices high, Westport's assets are particularly valuable, and, in an era of political unrest in oil-producing countries, relatively safe investments.
Note that the valuation of oil and gas firms can be deceptive. While by the standards of actual income, Kerr-McGee is in the 400s of the Fortune 500, it owns, as do other natural resource companies, reserves that have a real but inexact value in the future. Lower prices can hurt the value of the company, but higher prices have to help, and both oil and natural gas prices are booming. Of course, the question is whether the reserves are real or imaginary, something that investors in Royal Dutch Shell have learned to their dismay. The published sources state that the Kerr-McGee and Westport reserves have been reviewed and confirmed.
8:06:11 PM 
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