This year is shaping up as another “active” year for mergers and acquisitions (M&A) in the oil and natural gas industry, according to a new report by Standard & Poor’s (S&P). Many large independent and integrated producers face stagnant reserve replacement or falling reserves, and M&A has been a “safer path to bolstering the reserve base and production profile than the drillbit.”

In the eight-page report, credit analyst Paul B. Harvey noted the majors “hit on all cylinders in 2004, both upstream and downstream,” and “are particularly well positioned to fund acquisitions in a manner that would preserve their capital structures (read: flush with cash and not too much debt).”

For the same reasons, the larger exploration and production (E&P) independents also are “likely” to pursue strategic acquisitions, similar to the 2004 acquisitions of Westport Resources Corp. by Kerr-McGee Corp. and EnCana Corp.’s acquisition of Tom Brown Inc.

“In addition, midsize and small E&P companies will also continue to pursue acquisitions of properties and companies,” Harvey wrote.

For many E&Ps, “2005 should be another solid year, thanks to elevated pricing levels and hedging that has, at least partially, locked in favorable pricing.” Besides M&A, Harvey said there are two trends of “particular interest,” growing capital expense budgets and an increase in stock share-repurchase programs. “There is no avoiding the fact that many companies lack attractive reinvestment options for their cash windfalls and that share buybacks have become the more ‘economically attractive’ option in those cases.”

In general, said Harvey, the oil and gas industry is in a “pretty good place right now.” Most E&Ps have strengthened their balance sheets and improved liquidity, and he said the supply sector also has rebounded and “even the refining industry appears to have solid margins at the start of 2005.”

For more information, visit the S&P web site at https://www.standardandpoors.com/.

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