Desperation
An interesting Financial Times article ("Desperate to grow in a difficult environment", 3/23/06) traces the course of increasingly bold acquisitions in the oil industry. The article singles out the recent $2.1 billion purchase from BP of a share in the Shenzi oil field in Gulf of Mexico. The buyer was Spanish energy group Repsol YPF, with a yearly revenue of $60 billion and a presence in over 25 countries. The seller was oil giant BP. According to the article, that deal priced the field's oil reserves at a price of $100 a barrel. By contrast, US oil company Anadarko's purchase of Kerr-McGee earlier this year valued that company's oil reserves at about $40 a barrel. (Current world prices are at between $55 and $60 for comparison.)
As the article puts it, there were three factors involved:
- The company's managers believed that there were a lot more reserves in that field
- They were desperate to get more barrels (Repsol has recently lost some rights in Latin America)
- They thought the market was so hot they had to make such a high bid now.
The last may be the most important of all. The article sites a study that indicates prices for US oil fields per estimated reserve have shot up by 50% over the past year, while the average international rise in price has been over 150%. These prices have far outpaced the cot of oil.
Likewise the total number of such deals are up, according to the article:
"Mergers and acquisitions in the oil and gas industry more than doubled in value last year to $160bn - the highest level since the boom year of 1998 when Exxon and Mobil merged, BP took over Amoco, and Total bought PetroFina"
Surprisingly, some of the biggest players like ExxonMobil and BP are sitting this one out, in spite of enormous cash reserves. The article sees this as a combination of believing the assets are overpriced and gun-shyness about being hit hard by regulators.
So it is often the second tier oil companies that have been buying. And as country after country privatizes its oil fields and as Chinese state-run oil companies snap up assets, the prices have risen to seemingly absurd levels.
Among recent biggest recent deals just in the US:
A host of smaller ones have also taken place.
As in many industries, fear seems to be as big a motivator, if not bigger, than greed. We've seen such a feeding frenzy in other businesses, were being left out outweighs prudence. With well-venerable oil companies like Unocal (founded 1890) and Kerr-McGee (founded 1929) being taken over, every mid-size company has to be looking over its shoulder. Bulking up may be the only defense, whatever the cost.
