Mergers aren't always necessary to create value for shareholders, three industry executives said at Arthur Andersen's 2000 Energy Symposium in Houston recently. EOG Resources Co. chairman Mark Papa said that, to create value, producers must demonstrate strong reinvestment rates of return, generate above average net income throughout the commodity cycle, and realize that investors want both volume growth and net income. This can be done without merging. "EOG has not played the consolidation game," Papa said. "I'm not convinced that is that way to grow shareholder value." Dale Laurance, president of Occidental Petroleum Corp., said that the company has created value not by creating new markets, but by focusing its resources on a few large, long-lived core areas. From 1997 to 2000, Oxy has reduced its domestic presence from 15 states to five, and has trimmed its international exposure from 24 countries to 10. What has this shift done for the company? Production has grown from 395,000 barrels of oil equivalent per day in 1997 to an estimated 495,000 by year-end 2000. Eric Mullins, managing director of Goldman Sachs & Co., listed the usual reasons for upstream oil and gas consolidation: to fill in portfolio gaps, boost cash flow and strengthen balance sheets. Markets will punish companies that merge solely on that basis, Mullins warned. Look for more mergers among larger independents that are fairly close in size, said Dean Swick, Arthur Andersen managing partner of global energy corporate finance. As long as companies practice due diligence and use hedges to lock in commodity prices, there's no reason why mergers can't be a smart idea even during industry up-cycles. However, overpaying is a definite risk, he added. "While the market demands growth, sometimes companies that get in trouble try to buy their way out."
Recommended Reading
What's Affecting Oil Prices This Week? (Feb. 5, 2024)
2024-02-05 - Stratas Advisors says the U.S.’ response (so far) to the recent attack on U.S. troops has been measured without direct confrontation of Iran, which reduces the possibility of oil flows being disrupted.
What's Affecting Oil Prices This Week? (March 18, 2024)
2024-03-18 - On average, Stratas Advisors predicts that supply will be at a deficit of 840,000 bbl/d during 2024.
What's Affecting Oil Prices This Week? (March 11, 2024)
2024-03-11 - Stratas Advisors expects oil prices to move higher in the middle of the year, but for the upcoming week, there is no impetus for prices to raise.
What's Affecting Oil Prices This Week? (March 4, 2024)
2024-03-04 - For the upcoming week, Stratas Advisors expect the price of Brent will move sideways and will struggle to break through $85.
What's Affecting Oil Prices This Week? (March 25, 2024)
2024-03-25 - On average, Stratas Advisors are forecasting that oil supply will be at a deficit of 840,000 bbl/d in 2024.