The integrated majors are taking proactive steps to improve their growth curve, including a stronger focus in North America, an energy analyst with Raymond James & Associates Inc. said last week.
"The integrated majors have, on the whole, suffered from mediocre production and reserve growth rates over the past five years," noted Pavel Molchanov. Many, however, have begun to improve their growth by "gambling on high-impact exploration in frontier countries" and pursuing both acquisitions and joint ventures with exploration and production (E&P) companies in key U.S. resource plays.
According to Molchanov, the "average major had essentially no production and reserve growth" from 2005 through 2009. "There is no way that companies producing several million boe/d can sustainably grow production and reserves at a double-digit rate. Even a mid- to high-single-digit growth rate might be overly aggressive. But what about 2% or 3% growth -- that's surely achievable, right? The reality, alas, is different."
On a weighted average basis, a group of supermajors (ExxonMobil Corp., Chevron Corp., Royal Dutch Shell, BP plc and Total SA) and four smaller U.S. majors (ConocoPhillips, Marathon Corp., Hess Corp. and Murphy Energy Corp.) "eked out only 1.4% nominal annualized growth in proved reserves over the 2005-2009 time frame. Production was even worse -- it actually declined by an average of 0.2% per year." With acquisitions minimal (ConocoPhillips' Burlington Resources Inc. deal was an exception), "these figures largely reflect the organic, steady-state changes in the upstream businesses."
The majors also made "strategic missteps" in the past 10 years, the analyst said. Part of it was because of "resource nationalism" and related international issues that sent some of the big producers packing and increasingly limited the range of projects they could pursue. However, management teams also were more conservative in their capital spending and failed to take gambles. In addition, a "strategic blunder" was failing to explore in North America, "which, as it happens, is generating some of the world's best (on a risk-adjusted basis) resource growth opportunities," said Molchanov.
There now is a resurgence of interest in the United States and Canada by the majors worldwide, said the analyst, who pointed to ExxonMobil's agreement last December to purchase of XTO Energy Corp. (see NGI, Dec. 21, 2009). On Friday a subsidiary of India's Reliance Industries Inc. sealed a deal to partner in the Marcellus Shale with Atlas Energy Inc. in a transaction worth an estimated $1.7 billion (see related story).
"Notwithstanding the integration risks, we wouldn't be surprised to see other M&A [merger and acquisition] deals between the majors and E&Ps that are justified, in part, based on skillset development. And more generally, we expect to see more upstream M&A (albeit rarely, of course, on the scale of XTO) by the majors in the future."
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