Oil's Merger Year Leaves Some In The Lurch

Monday, September 20, 1999
TotalFina's European energy merger with Elf has tied up the rejuvenated oil sector's last obvious pairing but more marriages may still be on the cards. The revival of oil prices from historic lows that spurred furious company consolidation has not fixed the energy sector's underlying problems and other firms will have to seek strength through size, analysts said. U.S. Texaco and Chevron need acquisitions to avoid being left as Big Oil's poor relations while in Europe Italy's ENI, Austria's OMV and Norway's Norsk Hydro, all slowed by state holdings, have been left trailing. "The structural problems facing the industry have not gone away," said J.J. Traynor of Deutsche Bank. "Upstream you've got rapid declines at big, mature fields, mixed exploration results and lower peak output at new finds. Downstream you've got tighter environmental rules pinching margins." This means that firms will still be looking at new merger cost savings to help spruce up shareholder returns even though oil prices are now at their highest for nearly three years. "We're still in the big-is-beautiful cycle and the benefits from cost-cutting will keep coming through for the next two or three years," said John Toalster of SG Securities in London. BP Led Urge To Merge BP started the rush with last August's dramatic takeover of U.S. Amoco. Larry Goldstein of New York consultancy PIRA argues the merger wave was the culmination of oil's long-term contraction that first saw the U.S. industry shed half its staff through the 1980s. Now planned tie-ups like Exxon's fusion with Mobil, and BP Amoco's takeover of ARCO have changed the game. Slower rivals must find their own partners to keep up but the search will be harder now some of the choicest candidates have paired off, regulators are on red alert and the price rally has eased the urge to merge. Beware The Regulators Any planned new mergers will have to beware sharper scrutiny from antitrust regulators who worry that the mammoth tie-ups already agreed could be leaving too much oil in too few hands. Europe's outgoing Competition Commissioner Karel van Miert last week repeated his warning that any more mega-mergers from what he called the "big brothers" - taken to mean Exxon/Mobil, BP Amoco/ARCO and Royal/Dutch Shell - could be blocked. This could make upstream firms like Lasmo and Enterprise attractive targets as second tier firms scramble to keep touch with the big three, said SG's Toalster. Norway is also ripe for more changes, adds Deutsche's Traynor, as state giant Statoil ponders privatization and seeks to take over the government's own huge holding in the oil sector. And Central Europe could see the old order recast too with existing talks between Hungary's MOL and Croatia's INA potentially rippling out to involve OMV. Oil's price rise means that Anglo-Dutch giant Shell's decision to step back from the merger scrum and concentrate on its own restructuring has won praise from analysts. But it does not mean that companies like Amoco, ARCO and Mobil should be kicking themselves for giving up their independence too easily, analysts say, adding that prices are unlikely to stay this high for long. "The industrial logic behind the mergers is still there," said PIRA's Goldstein. "The price is a shareholder issue not a strategic issue." Oil's next horizon should now see the new breed of supermajors seek ways of forging links with the state firms in key Middle East, African and Latin American producers. "The next big phase is interrelationship with national oil companies," said Goldstein. "We are already seeing signs of it and it is more likely to happen with companies the size of Exxon/Mobil."

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