Market drives mergers

Oct 20, 1997 02:00 AM

Sept. 5, 1997 The risk and expense of exploring for new oil and gas reserves, combined with a tight market for drilling rigs, means that energy companies are increasingly being driven to mergers or acquisitions.
So far this year, mergers and acquisitions in the North American energy sector have been worth $ 11.8 billion, more than the $ 8.3 billion for all of 1996, according to Securities Data Co.
Another $ 1.2 billion was added recently when Pioneer Natural Resources Corp. said it would buy Chauvco Resources' Canadian and Argentine assets. The price includes assumption of debt.
Industry analysts said they expected the trend to continue.
"It is very difficult to find new areas with significant growth potential and it can take 4 to 5 years to develop a new discovery, so companies are looking to acquisitions," said Robert Morris at PaineWebber. According to PaineWebber's annual exploration and production survey, the cost of finding oil and gas via the drill bit rose last year for the first time in three years, a trend it expects to continue in 1997.
Although the latest transaction stands out because of Pioneer investor Richard Rainwater's personal philosophy -- he believes the world could soon face an energy shortage -- Pioneer's move to become the second largest independent producer in the United States is part of a wider trend, analysts said.
Major oil and gas companies have been steadily selling off U.S. assets to fund exploration overseas, where the potential rewards are greater even though the risks are higher. These assets are being snapped up by independents who can operate more efficiently, using new technology such as 3-D seismic and horizontal drilling to improve recovery rates.
"It used to be that when you bought old oil and gas properties, you were buying someone else's headaches," said Stephen Smith, analyst at Rauscher Pierce Refesnes, "but with new technology heavy oil extraction is becoming more economic and you can often drill underneath existing prospects," he added.
Analysts expect the current pace of merger activity to continue, especially in the natural gas sector, where prices have jumped sharply.
This bodes well for Amoco Corp., which is in the process of selling 15 % of its U.S. reserves to fund expansion overseas, a deal that could be worth $ 2 billion.
"Although the market is not overpaying, this is a good time to sell. On a scale of one to 10, I would rate it a 7 as far as a seller's market goes," said Smith. Plenty of independents are in the market for acquisitions.
Burlington Resources Inc., which bid $ 3 billion for Louisiana Land and Exploration Co., said it was on the hunt for more and Rainwater has not ruled out further acquisitions for Pioneer. "Apache Corp. is a company which has grown by acquisitions, I do not think you can ever rule them out," said RPR's Smith. He added that Noble Affiliates Inc. remains on the lookout and Oryx Energy Co. may be also be a buyer. Oryx said it would buy if the deal was right but was "not actively pursuing a transaction" while Apache is pursuing a twin strategy of growth by the drill bit and acquisitions. Among the independents there are also some companies that may be targets, including Enserch Exploration Inc. and Triton Energy Ltd., analysts said.

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