The Oil Industry: The big becoming bigger
The Oil Industry: The big becoming bigger
by Andrew Leckey
The
oil industry has become a Rubik's Cube of potential combinations.
For
example, there's speculation that Mobil and Chevron might merge, or that
Mobil might decide to buy Arco. Perhaps Royal Dutch/Shell will purchase
Texaco. Don't forget that Conoco, currently owned by DuPont, is already
up for sale. Unocal might be yet another interesting purchase target. Overseas,
if the French government agreed to it, Total and Elf Aquitaine might conceivably
tie the knot in order to muster more international clout.
All
these "what if's" are due to British Petroleum's recently announced
blockbuster $48 billion takeover of Amoco to form what would be known as
BP Amoco. The largest industrial deal in history was prompted by oil prices
that have remained low, at less than $14 a barrel, which has, in turn, promoted
low oil company stock prices as well.
Most
oil companies reported sharply lower profits and revenues in the second
quarter. However, cost-cutting chief executives, such as BP's Sir John Browne,
have all the confidence in the world that they can save considerable money
by making the operations of such merged giants considerably more efficient.
So
long as oil prices remain low, consolidation will continue. The question
is when prices might start rising, since that would close the current window
of opportunity. Right now, analyst estimates of the likely course of oil
prices are all over the lot.
Also,
keep in mind that not everyone absolutely loves that British Petroleum deal,
which would put the new company's market value just behind leaders Exxon
and Royal Dutch/Shell Group.
"Being
betterwhether you're bigger or smalleris everything in this business, while
being bigger for the sake of bigger is a poor argument," sighed John
Hervey, oil analyst with Donaldson, Lufkin & Jenrette in London, who's
a bit disappointed that the British Petroleum deal even took place. "I
have confidence that British Petroleum management will achieve the cost
savings it's talking about, but I'm not sure you can justify it for the
price paid."
The
price of oil should reach the upper teens by year's end or early next year,
Hervey believes, because of aggressive supply cutting.
Other
analysts love the idea of the big becoming bigger.
"We
think the BP/Amoco deal is good for both companies because it allows both
to diversify their portfolios and combine their strengths," explained
Adam Sieminski, oil analyst with BT Alex Brown in Baltimore, who also believes
the estimate of 6,000 jobs destined to be lost in the merger is too conservative.
"We also believe that oil prices should bounce back to $20 a barrel
pretty quickly, perhaps by year's end."
Oil
stocks will be looking a lot better than they do now by the end of the year,
Sieminski predicted. They should hold up better than other groups during
market volatility, they have fairly low price/earnings ratios, and they
provide fairly decent growth rates.
"The
level of industry consolidation should be directly related to the oil price,
which we think will continue to be weak throughout the second half of the
year," predicted Steven Pfeifer, senior international and domestic
oil analyst with Prudential Securities. "We do think, however, that
oil prices will then recover back to $17.50 a barrel."
Oil
stocks provide some defensive characteristics, Pfeifer believes. He also
sees little difference between international and U.S.-based oil companies
these days, which makes virtually any corporate combination feasible.
"We're
seeing more negotiating power, more consolidated wealth to attack bigger
deals, more presence to go up against governments and more ability to exert
control over suppliers," explained Benjamin Rice, Jr., oil analyst
with Brown Brothers Harriman. "I have a forecast of $16.50 a barrel
for oil this year and $17.50 next year and suspect we'll have to lower our
forecast for this year."
Here
are the stock recommendations of these oil industry analysts, most of them
based on fundamentals and not simply merger potential:
Mobil and Texaco are favorites of Hervey and
Sieminski, mostly because their stock valuations are so attractive and both
firms have a proven ability to derive more profit per dollar of assets than
their competitors.
As
far as participants in the "big deal" are concerned, Amoco
is suggested by Hervey and Sieminski, while British Petroleum is
a pick of Hervey, Sieminski and Pfeifer. They clearly admire the prospects.
France's
Total is a choice of Hervey, Sieminski
and Pfeifer.
Arco, Unocal, Chevron and Elf Aquitaine
are Sieminski favorites.
Philips
Petroleum is another Hervey pick.
USX-Marathon is a Pfeifer choice.
Royal
Dutch/Shell is Rice's sole selection,
while he currently has holds on most of the other major companies.
Editor's Note: Andrew Leckey is a financial anchor on the CNBC Cable Network.
© 1998 Tribune Media Services, Inc.
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