De-verticalization in the energy industry
A recent New York Times Dealbook article ("A Big Year for Small Energy Deals", 9/5/08) notes that "it appears that while the total volume of energy deals is down so far this year, the number of energy-related deals is up significantly." In other words, the money value of the acquisitions is lower than year ago, but the actual amount of deals has risen by 20 percent.
One reason for this is that petroleum deals have always had problems getting loans from banks, due to the high volatility of the industry. But with cash flow high, oil companies are readier than ever to consolidate. It's just that the big multibillion dollar deals have slowed.
In the past few months, among many other deals:
- BP bought some properties from the US's Chesapeake Energy ($1.9 billion)
- Italy's Eni bought Canada's First Calgary Petroleum ($866 million).
- GDF Suez bought oil and gas assets from Dutch oil company NAM ($1.56 billion).
- Royal Dutch Shell acquired Duvernay Oil, a Canadian -based natural gas producer ($5.9 billion)
- ConocoPhillips acquired a 50 percent interest in a joint venture with Origin Energy of Australia, which produces coal-bed methane ($8 billion)
- India's ONGC bought UK-based Imperial Energy for $2.6 billion
Here are some of the trends I see.
The big Western oil companies, Shell, ExxonMobil, Bp, were once involved in a vertical command of the industry, from exploration to exploiting and maintaining oil fields to delivery to refinery to retail. Over the years they have move away from that stance, trying to get out of less profitable layers of the business.
That means that Big Oil is getting out of retailing (ConocoPhillips, the latest. just sold its 600 US service stations to a privately held firm for $600 million). They are getting out of risky exploration and exploitation projects in Russia, Africa, and Central Asia. (Note that Chinese and Indian companies are taking on those risks). The bigs are buying developed fields in Western countries (US, Australia, Canada, North Sea). That leaves the field open for smaller companies and especially non-Western companies to take up the slack.
The point is that the big energy companies will make money however perilous retail or exploration may be and however bad things get in Nigeria or Russia. They will still be in the middle, as long as there is no big move to build more refineries.
