Credit crunch may unleash "forest fire" of consolidation across oil industry

Oct 12, 2008 02:00 AM

by Robin Pagnamenta

The credit crunch is set to unleash a "forest fire" of consolidation across the oil industry as smaller exploration companies struggle to refinance debts, according to industry experts.
"Right now, if you are a pure exploration play in need of cash, then you have no hope. You are in dire straits," Richard Griffith, director of equity research at Evolution Securities, said.

As smaller companies struggle to refinance debt in the market turmoil, stronger companies are well placed to bolster their reserves by snapping up weaker rivals. Steep falls in oil and share prices have also demolished valuations that had soared as crude prices touched highs of $ 147 per barrel.
Urals Energy, the Russia-focused oil explorer led by Boris Yeltsin's former son-in-law, could be among the first UK-listed oil companies to fall victim to the credit squeeze. It has estimated reserves of 822 mm barrels of oil, mainly in two fields in Siberia, but its share price has plunged by more than 90 %, in the past year to only 15 %.

The AIM-listed company is struggling to renegotiate two separate loans worth more than $ 600 mm, which are due to roll over in November. The group, fearful that negotiations with Sberbank, of Russia, will fail in the present turmoil, is locked in talks with a large oil company, thought to be Royal Dutch Shell, about a joint venture that could lead to its share of some of its best assets being heavily diluted.
Urals is not the only vulnerable company: a slew of bids has ignited the oil and gas sector, even as global markets have fallen. Shares in Soco, the Asia and Africa-focused oil group, surged by 40 % as it confirmed that it had received an approach, thought to be from Sinochem, of China.

Others likely to be concerned about their vulnerability include Bowleven, the Cameroon-focused explorer, Borders & Southern, Dominion, Falklands, Faroe, Indago and Nautical.
"It will be like a forest fire, with only the stronger trees left standing in a few months time," Mr Griffith said.
Those with existing production and cash flows stand to benefit, including mid-sized groups such as Cairn Energy and Tullow, as well as giants, such as Shell and BP.

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