FINANCIAL TIMES: Trust fund: “BG and Murphy Oil are obvious targets.”: “Shell and second-tier players like ConocoPhillips - which cut production growth targets last week - might be tempted. Either way, with Arabia's treasures still firmly off-limits, fear of dwindling reserves is causing the post-1998 consensus to crumble. Shareholders' trust will be tested.” (ShellNews.net) 11 April 05
Published: April 11 2005
Trust is a scarce commodity when oil prices are high. Historically, oil executives have splurged on acquisitions in the mistaken belief that spot prices would defy gravity forever. All that changed back in 1998, when $10 oil forced the industry to embrace the mantra of financial returns over growth. But does ChevronTexaco's purchase of Unocal signal a return to the old days? It was undoubtedly a super-cycle deal. Forward markets support assumptions of $50 oil for some years. But this is an industry that typically plugs prices of $20-$25 a barrel into investment models.
Chevron's deal underlines the oil majors' big problem: access to resources. As they struggle to replace their reserves, high crude prices should mean more drilling. But two-thirds of the world's proven reserves lie under the Middle East, Russia and Venezuela - where the welcome mat for foreign producers is threadbare to say the least. Hence the temptation to buy barrels on the stock market, fuelled by strong balance sheets. Chevron aside, the integrated US and European oil companies have over $45bn of cash burning a hole in their pockets.
The $10.50 a barrel Chevron paid for Unocal's proved reserves - which excludes production costs - is expensive by historical standards. But it is still below preliminary estimates for industry-wide organic drilling costs last year. Investors might balk at the majors assuming higher oil prices in their investment criteria. But the explosion of interest in more esoteric (and expensive) energy sources such as oil sands is, de facto, an admission that this is happening already.
More acquisitions are almost certain to follow. Marathon Oil is the latest to put itself on the block. BG and Murphy Oil are obvious targets. Holding some of the best development prospects currently available, they are not cheap. But still, Shell and second-tier players like ConocoPhillips - which cut production growth targets last week - might be tempted. Either way, with Arabia's treasures still firmly off-limits, fear of dwindling reserves is causing the post-1998 consensus to crumble. Shareholders' trust will be tested.
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