The Observer (UK): Oil giants go on the prowl: “And if Shell thought it was safe, it ought to remind itself that TotalFinaElf, the French colossus, might dust off its takeover plans ... and so on.” (ShellNews.net) 10 April 05
Sunday April 10, 2005
The oil industry is awash with talk of deals. Hot on the heels of last week's $18 billion takeover of California explorer Unocal by ChevronTexaco came whispers of further ten-figure takeovers here, there and everywhere. BG Group was vying with German energy giant E.ON to get hold of Canadian exploration and production outfit First Calgary (price tag, £1.7bn), while Eni of Italy and Repsol of Spain were queueing up as well.
But just as (and if) BG was eyeing its prey, it ought, other whispers suggested, to keep an eye on the shadows at its back, and one in particular - Shell, the Anglo-Dutch giant with plenty of cash but not enough oil. And if Shell thought it was safe, it ought to remind itself that TotalFinaElf, the French colossus, might dust off its takeover plans ... and so on.
There is a rationale of sorts behind all of this, as there is with much merger talk derived from the backs of investment bankers' envelopes. For example, before Monday Shell had company when analysts drew up lists of majors with dismal records in replacing the oil they pumped. While it saw its replacement rate tumble, to below 100 per cent (ie, it was shrinking) it could point to ChevTex, where the average over the last three years has been 82 per cent (ie, it was shrinking too). The Unocal deal, which makes ChevTex the second biggest player in Asia - giving it assets in Thailand, Indonesia and Australia - has changed that. And that is the rationale for the deal, an Asian land grab.
The purchase at once excited the market and left it financially underwhelmed. Unusually, the shares of both acquirer and target fell after the announcement, implying that investors think ChevTex overpaid and Unocal got less than it should. As one analyst said, the reaction indicated people valued the acquisition on one basis (the dilutive effect on ChevTex's return on capital) and the sale on another (the market has known for months that Unocal is for sale and was disappointed with the final price for its prime assets in the world's hot industrial spot). In other words, there is confusion.
This is as much about when the deal was done (and the resulting price) as ChevTex's strategy. When Shell made its much criticised acquisition of explorer Enterprise Oil (it overpaid at £4.3bn, according to the market) oil was about $26 a barrel. When BP bought into Russia via its deal with TNK in autumn 2003, the price was about $30. When it did its transformational US deals in the late Nineties (as ChevTex did last week) the oil price was languishing after the Asian crisis. Then, the reasoning was familiar: with the cycle at its nadir companies were struggling to bring in cash and make impressive returns, so there were economies to be had from deals along with strategic advantage for those spotting the right chances at the right time at the right prices. BP spotted two - Amoco, and later its US sibling Arco - and it has remained at a premium to Shell ever since.
But last Monday, on the day ChevTex announced its takeover, oil futures for August touched $60. The company had a job explaining what it was up to. The explanation was something like: there is now too much cash, it cannot all be given back to shareholders, but ChevTex has too little oil (analysts did not believe it would start growing again without acquisition until 2007). So it needed to buy some via a takeover. With oil at its current price, they had to pay a lot: although Unocal's share price had risen by nearly 50 per cent this year on rumours of a deal, its assets had an equity book value of some $5bn. The hefty premium - largely 'goodwill' - and its effect on ChevTex's return on capital were not easily explained, and the shares were marked down.
But this is not the full story, as the swelling rumours of further takeovers - involving US integrated operators such as Amerada Hess, Marathon and Occidental along with some 7,000 E&P operators - indicated. Companies are interested in paying top dollar for cash-generating assets. Several years ago they would not have considered deals that did not stack up with oil prices in the mid $20s. No longer - as Lord Browne said at the time of the BP-TNK deal, it did not expect a return on its capital investment below $29. There are reasons to believe they are right. For example, two weeks ago Goldman Sachs said there could be a price spike of up to $100 because of supply/demand imbalances. Chances for investing around the world are shrinking - Yukos fallout and tax changes have virtually closed Russia off, most Opec countries are difficult, Mexico and the US are tricky too. Meanwhile, Chinese industrial demand and US driving habits, look set.
One New York analyst coined classic Wall Street jargon to explain. 'Oil companies are caught between greed and fear, by wanting to build reserves by cashing in on the wealth they have got while the price is where it is, against the fact that the price of oil over the past 25 years has been about $25.
'Don't forget,' he added, 'we are less than a decade from the Asian crisis and $10 oil, and less than four years from a whole quarter at $18.50 in the aftermath of 9/11.'
In other words, oil boards will be agonising over the rewards of cashing in at present prices against the risk of watching the price slump and writing assets down later. ChevTex has made its pact with the crude markets, and mitigated the riskby paying largely in shares. Others, such as Shell, must agonise over whether to follow.
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