THE WALL STREET JOURNAL: Energy Sector Is Likely To See Season of Deals: “In the energy sector, 2005 could be a banner year for mergers and acquisitions.”: “…Total and Shell could be possible early movers to make acquisitions…” (ShellNews.net) Posted 26 Jan 05

As Profits Fuel War Chests,

Major Firms Are Expected

To Look for Acquisitions

By MICHAEL WANG

DOW JONES NEWSWIRES

LONDON -- In the energy sector, 2005 could be a banner year for mergers and acquisitions. Flush with cash after a year of 21-year-high oil prices, climbing natural-gas prices and fat refining margins, oil and gas companies have built formidable war chests.

In October, British oil giant BP PLC reported third-quarter net profit equivalent to about $2 million an hour. Last week, investment bank Credit Suisse First Boston added its opinion to the consensus: "In our view, nearly all the integrated oil [companies] are likely to be in the market for acquisitions."

As many of its countries prepare to join the European Union, Central Europe continues to be a fertile basin for M&A. Three companies -- OMV AG of Austria, MOL Rt. of Hungary and PKN Orlen SA of Poland -- have emerged in the past five years as regional powerhouses, particularly in gasoline retailing and refining. Each could emerge as a dominant force: Since 2000, the trio of companies have acquired regional energy assets valued at a combined $5 billion.

Ultimately, the winner of the regional consolidation race -- most likely OMV or MOL, analysts say -- is likely to face a takeover itself. Royal Dutch/Shell Group, BP and Total SA have long been considered the top predators, but that grouping has broadened to include OAO Gazprom and OAO Lukoil.

PKN Orlen, Poland's largest company in terms of market capitalization, bolstered its credentials in 2004 when, in partnership with U.S. oil heavyweight ConocoPhillips, it was the winning bidder for a 63% slice of Czech oil refiner, fuels retailer and petrochemicals maker Unipetrol Holding for a little more than $500 million. The deal still requires EU approval, and the price is subject to change depending on the outcome of a re-evaluation of Unipetrol's asset base at the time of the closing of the deal, expected in the first quarter.

With the purchase, PKN Orlen will stretch its lead as Central Europe's biggest fuel-products retailer, with about 2,700 filling stations spread across Poland, the Czech Republic and northern Germany -- about a quarter of the 10,800 sites operated in Europe by France's Total, Europe's biggest gasoline retailer.

OMV undertook its biggest acquisition last year, acquiring a 51% stake in Petrom SA, Romania's dominant oil and gas producer, refiner and marketer, for about €1.5 billion, or about $2 billion. Overnight, the deal nearly tripled its oil and gas production and reserves. This year, OMV plans to invest as much as €400 million in Petrom.

The big three Central European firms are likely to continue to absorb smaller energy companies in an area from Austria to Poland to the Balkans, and even Turkey. But they could take a bit of a breather in 2005 to focus on capturing gains and improving efficiencies, analysts say.

"OMV's biggest challenge in integrating Petrom will be managing the transition internally within its own organizational structure," said Louis B. Gagliardi, an analyst at energy-industry researchers John S. Herold Inc. in Norwalk, Conn.

But predictions of an M&A slowdown could be turned on their ear if big oil companies such as BP, Total or Eni SpA of Italy decide the big Central European companies are worthy prey. For 2005, CSFB says Eni, Total and Shell could be possible early movers to make acquisitions, but the bank reckons North American midcap oil companies will be their preferred targets.

Another candidate being readied for privatization is Serbian oil company Naftne Industrije Srbije, known as NIS.

Write to Michael Wang at michael.wang@dowjones.com