Energy stocks are soaring, and it’s not just the price of crude oil futures, now stuck above the $50 dollars a barrel level, that are heating them up.
The reason is oil and gas companies are flush with cash, and they’re under pressure to build up their underground reserves.
This could lead to a round of deal-making, say energy industry experts like T. Boone Pickens, a Texas oil magnate who has made a long career out of investing in the oil patch.
“It’s very hard to find oil and gas reserves and replace your [losses],” Boone Pickens said. “From year to year, your reserves go down; by acquisition and consolidation, you can take care of that for a period of time.”
The last wave of mergers and acquisitions in the energy sector led to consolidation among energy giants like Exxon and Mobil, Chevron and Texaco, and BP and Amoco.
This time around, the global hunt for resources is driving the deal-making, and some of the potential targets are smaller.
One of the most talked-about deal targets is Unocal, which has large holdings in Asia. And reports of interest from China’s state-owned oil company, CNOOC, have sent Unocal’s share price surging on the New York Stock Exchange. CNOOC declined to comment on the reports.
Also, the Wall Street Journal reported this week that oil giant ChevronTexaco may be weighing a bid to buy smaller rival Unocal.
Boone Pickens and other energy analysts say Canadian oil sands companies, like Suncor Energy, Nexen and Canadian Natural Resources, are other likely targets. Suncor had no comment on the speculation.
Oil sands companies extract oil from the gritty tar sands found north of the border. It’s an expensive process, but soaring oil prices have made it an attractive option for energy companies.
U.S. companies exploring for natural gas are also ripe for the picking according to a recent report by investment bank Goldman Sachs. These companies include Encana, EOG Resources, Devon Energy, Burlington Resources and Anadarko Petroleum. Goldman has banking relationships with all these companies.
Overall, analysts say the energy sector is going to look like a big dancehall, with companies asking other companies to dance, and there will be matches and also some mismatches.
One big question is whether deals can be done when the share price of target companies are so high. Energy giant BP’s CEO recently said he doesn’t see any opportunities in the energy sector right now, and this week investment bank Credit Suisse First Boston (CSFB) lowered its rating on Anadarko from “outperform” to “neutral.” CSFB said the company’s stock price has already had a good run.
And there is always the possibility that the hunted become the hunters. Several companies on Goldman’s target list that spoke to CNBC said they wouldn’t comment on whether they are takeover targets, but companies like Burlington Resource, Anadarko Petroleum and Encana said acquisitions are part of their own strategies for growth.