With lmany junior and mid-size independents continuing to struggle in North America, the oil majors once again are said to be ready to shop for some bargains to build their portfolios both onshore and offshore in North America.
Energy analysts in recent months predicted mega producers would begin to pick off struggling independents faced with mounting debt and a lack of available financing. Two junior explorers earlier this month filed for voluntary bankruptcy protection (see NGI, April 6). And just weeks ago analysts said it was a buyer's market (see NGI, March 9). Still, the only large North American merger of note since the beginning of this year is the friendly takeover by Calgary-based Suncor Energy Inc. of Petro-Canada for C$19.6 billion (see NGI, March 30).
For the majors, all has been quiet on the North American front. Are they ready to bring on the noise?
ConocoPhillips, one of North America's biggest gas producers and energy marketers, will lead off for the majors with quarterly results on Thursday (April 23). Chevron Corp., ConocoPhillips and Marathon Oil Corp. all said in interim reports that their gas and oil output is higher sequentially from 4Q2008 (see related stories), but they still expect to have underwhelming financial results because of lower commodity prices. Beyond the earnings numbers, energy analysts are looking at the mega producers' reserves, which, overall, continue to trend south. Big Oil companies, they say, need to build their gas and oil reserves for the future, and there may be no better time than now.
"The main theme [is] the return of the super majors to North America, drawn by resource plays," said Canaccord Adams' Richard Wyman. "Nobody is immune here. All are digestible."
Oppenheimer & Co.'s Managing Director Fadel Gheit, who heads oil and gas research arm, said the majors benefited in the last half of 2008 because investors looked for safe investments. Now investors are favoring smaller companies with "higher growth potential." The majors, still cash rich, are reserves poor, he noted. Going into the 1Q2009 earnings season, energy analysts may reduce their estimates on the majors, which will hurt stock valuations, he said. To blunt that effect, majors might be considering "mega-mergers" to allow them to reduce their capital spending and operating costs, and in turn pave the way for higher earnings ratios.
A merger among the biggest producers is a possibility, but there may be too many regulatory hurdles, Gheit admitted. And those regulatory obstacles make those types of mergers "less likely." Instead, given the current economic climate and with the political risks overseas, the majors may build their portfolios in North America -- especially in onshore natural gas shale plays and in the Gulf of Mexico (GOM), said Gheit.
Many of the majors already have a healthy portfolio of North American and deepwater GOM assets, and with some independents struggling, the region may take on a new luster.
"We think the current industry environment represents a unique investment opportunity for oil majors to establish or increase their presence in areas with significant growth potential," said the Oppenheimer analyst. "If mega-mergers are deemed off the table by regulators, we expect cash deals for assets and stock deals for companies."
For the gas-directed independents, investors and analysts will be looking at other factors to determine their strength going forward. One issue will be the amount of gas that is hedged and at what price, said Dan Pickering of Tudor, Pickering, Holt & Co. Securities Inc. (TPH).
For instance, EOG Resources Inc. said it expects to record a 1Q2009 gain of $351.4 million because of the increased value of derivatives contracts used to lock in gas prices. However, Pickering was more interested in EOG's additional gas hedges. EOG added 100 MMcf/d swaps at $4.57/MMBtu for June-October, giving it a total 710 MMcf/d swapped and 40% of 2009 gas hedged at $9.20/Mcf.
Those additions, and the prices, "support our gas worries," the TPH analyst said.
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