Credit crisis, cheaper crude to boost oil M&A

By Tom Bergin - Analysis

LONDON (Reuters) - The credit crisis will spur more takeovers in the oil and gas industry as cash-rich oil majors and utilities pounce on small and mid-cap companies whose shares have been hit hard as they struggle to fund developments.

Oil majors such as Exxon Mobil and Royal Dutch Shell Plc will likely use the crisis to accelerate their strategic push into North American gas production and the Canadian oil sands, bankers and analysts said.

Similarly, utilities like Germany's RWE, France's GDF Suez and Britain's Centrica, which have long sought to produce more of the gas they retail, are also predicted to take advantage of lower asset prices.

"We would expect there to be more consolidation," said Karl Nietvelt, director of oil and gas at S&P. "Prices are indeed very cheap."

Recession fears have halved the price of oil since July, when it topped $147/barrel. The drop has hit share prices across the sector but small and mid-size oil and gas exploration and production (E&P) firms have been among the hardest hit.

This is because the E&P players are more leveraged to crude than the oil majors, which have refining, chemicals and retail units, and because, with low production levels or none at all, the E&P firms are more reliant on debt funding.

Devon Energy President John Richels said earlier this month he expected consolidation among mid-size North American E&P players, typically worth between $5 billion and $20 billion, which have expanded rapidly in recent years.

Thierry Bros, analyst at Societe Generale in Paris, said the majors may snap up such firms or their assets to help address their own failure in recent years to grow their reserve bases.

"Some of the independent companies are facing trouble. It's going to be a good way for the majors to get resources in a non-OPEC country," Bros said.

UNCONVENTIONAL GAS

Bros thinks the majors will be especially keen to use their strong cashflows and low debt levels to expand in "unconventional" gas plays, such as tight gas, coal bed methane and shale gas - which are more plentiful than traditional gas opportunities but more difficult and expensive to exploit.

Chesapeake Energy, which holds vast unconventional gas resources, said it would sell up to $3 billion in assets in the fourth quarter to fund developments after shares in the highly leveraged company slumped on funding fears.

British oil giant BP Plc is expected to be among potential bidders after agreeing last month to buy a minority stake in some of Chesapeake's shale assets for $1.9 billion.

The majors could take advantage of similar weakness among the smaller players in Canada's oil sands industry, where companies squeeze crude from bitumen-soaked soil, Nick White, head of the energy practice at consultants Arthur D Little said.

A surge of interest in oil sands in recent years lifted asset prices and operating costs to levels that deterred some oil majors such as Italy's Eni from investing.