By Daniel Gilbert
The costs of finding oil are on the rise. The value of some
smaller oil companies has tumbled. For the world's biggest crude
producers, this adds up to a question: Is it cheaper to buy someone
else's oil than to go digging for it?
As Exxon Mobil Corp. and Chevron Corp. report quarterly profits
this week, executives are likely to face questions about their
appetite for megadeals like the $70 billion takeover Royal Dutch
Shell PLC announced earlier this month of BG Group PLC.
"There is no doubt that it's much, much less expensive to take
over a company than develop a new oil project in order to replace
reserves," says Leonardo Maugeri, a scholar at Harvard's Belfer
Center and a former executive of Italian oil company Eni SpA. He
expects the most likely takeover candidates would be oil companies
with a stock-market value between $10 billion and $40
billion--relatively small compared with Exxon's $368 billion market
capitalization.
The rising costs of finding and producing oil were eating into
profits even before global crude prices began to slide last summer
from over $100 a barrel to about $66 today. The price collapse has
intensified a push by companies to cut costs and shed
less-profitable operations.
BP PLC reported Tuesday that quarterly profit fell 40% from a
year earlier, despite an increase in oil and gas output and a boost
from its refining business. Analysts forecast profits for Exxon,
Shell and Chevron will be at least 60% lower than a year ago.
Since 2010, Exxon has spent an average of $29 billion a year on
finding and tapping oil and gas, adding an average of 1.5 billion
barrels a year to its proved reserves--the inventory of fuels it
can pump at a profit. That works out to about $19 a barrel.
But it could get almost the same amount of fuel for less money
by buying a smaller rival now that energy companies' stock market
values have fallen along with the price of crude.
For example, shale-oil driller Continental Resources Inc. has
1.35 billion barrels of proved reserves and a stock-market value of
less than $20 billion, or less than $15 a barrel of proved
reserves. The company, which is controlled by Chief Executive
Harold Hamm, has lost about 22% of its stock-market value in the
last 12 months. Continental declined to comment.
Some analysts think that some U.S.-focused midsize companies are
likely to get even cheaper in coming months. Barclays analysts
noted on Wednesday that the shares of some drillers appear to
assume an oil price of $95 a barrel, far above today's $58 price
tag for U.S. crude--and more than futures contracts for oil a year
from now.
Exxon and peers point out that they have discovered a lot of oil
and gas that they haven't yet booked as proved reserves, which they
generally wait to do until committing the money to drill them.
Exxon, for instance, says it has found the equivalent of 92 billion
barrels of oil, of which a little more than a quarter is counted as
reserves. It says it spent just $1.25 a barrel last year to find
the oil and gas that it hasn't yet committed to pump.
Because oil and gas wells decline over time, energy companies
are constantly trying to replace them. The cost of finding more
fuel has shot up for the world's biggest energy companies, as they
have pursued oil from beneath Kazakhstan's icy Caspian Sea,
developed facilities to export natural gas from the remote reaches
of Western Australia and mined gunky crude from Canada's oil
sands.
Exxon declined to comment. But asked in March about potential
acquisitions, Rex Tillerson, Exxon's chief executive, told analysts
that the oil-price crash offered "a whole lot of different kinds of
opportunities, not just in terms of accessing new resources through
various means but also getting the cost structure back to where we
believe it is more appropriate."
The biggest U.S. oil company wields tremendous takeover power
with its ability to borrow cheaply and a hoard of shares that could
be used in a merger.
For years, Exxon has saved money by reducing its global
workforce, which is down by almost a third since its 1999 merger
with Mobil Corp. Exxon now has fewer employees than 20 years ago
and pumps 50% more oil and gas.
But getting bigger today might not create the savings energy
companies are seeking, some analysts say. "They've got huge scale
now," says Tom Ellacott, a senior analyst at the consultancy Wood
Mackenzie. "It's proved quite difficult to grow with that sort of
scale. I think another wave of megamergers is quite unlikely at the
moment."
Instead, he says companies will make acquisitions to fill in
gaps in their holdings or to building on existing strengths, as
Shell proposes to do by swallowing BG.
Before the deal, Shell talked up its ability to discover oil and
gas cheaply and played down the value of acquisitions. But then
Shell paid a 50% premium for BG, enhancing its dominance as a
global shipper of natural gas and acquiring potentially massive oil
deposits off the coast of Brazil.
Justin Scheck contributed to this article.
Write to Daniel Gilbert at daniel.gilbert@wsj.com
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