Bernstein predicts return of oil M&A bonanza

LONDON Fri Jan 11, 2013 12:21pm EST

LONDON Jan 11 (Reuters) - The climate is right for a repeat of the oil company takeover bonanza that began when Britain's BP pounced on United States-based Amoco in 1998, according to a research note by analysts at Bernstein.

The Amoco takeover was followed by a number of giant merger deals at the turn of the century, including Exxon's combination with Mobil, Chevron's takeover of Texaco and Total's absorption of Fina and Elf.

Analyst Neil Beveridge and his team argue that the wave was driven by stable but declining oil prices, underperformance against other sectors, the potential for cost cuts and the competitive threat from national oil companies. It ended as rising commodity prices delivered improved returns across the industry from 2002 to 2008.

Last year, he notes, M&A transaction value topped $250 billion for the first time since that bumper year in 1998, up from an average of $150 billion a year since 2005.

"Clearly something is starting to change in the industry," he says in the note. "Could this increase in activity mark the start of a new super-cycle in global oil and gas M&A?"

Some of the same 1998 factors are back in place, he argues, including flattening oil prices and underperformance of oil relative to other sectors. One new factor that could lead to a wave of M&A is the arrival on the scene of Asian companies that are "increasingly aggressive in their desire to acquire".

Another factor is that the average enterprise value of top companies per barrel of reserves has risen above the cost of replacing those reserves. "The relative attractiveness of buying rather than replacing reserves is now higher than it has been in the past two decades," the note said.

But Beveridge warns that the "big is beautiful" mantra of 15 years ago may not apply in M&A deals this time.

He notes the successful break-up of Conoco from its refining arm Phillips 66 as an example and says that Chinese state firm CNOOC's bid for Canada's Nexen is unlikely to be repeated in type and scale, given growing resource nationalism in countries such as Australia and Canada.

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