Oil companies look for place to put their cash

Twenty years ago, T. Boone Pickens zeroed in on balance sheets of American oil companies with under performing assets and made bids -- often hostile ones -- for targeted companies. His credo of management providing "shareholder value" set off a cycle of consolidation within the oil industry not seen until recently when oil companies -- once again flush with cash from high prices -- are merging again.
"Oil mergers are not something we didn't anticipate or see happening," said Pickens, former head of US independent oil and gas producer Mesa Petroleum, referring to the current spate of industry mergers. "The industry is going to continue to consolidate. It's overcapitalised just it was back in the 80s. They just don't have a good place to spend their cash flow. There's a lot of money in the industry and not a lot of opportunity. "

Back in the 1980's, Pickens's bid for Gulf Oil, the weakest of the seven sisters in America's oil hierarchy, set off a chain reaction of industry takeovers and mergers. Gulf subsequently was folded into Socal, which is now called Chevron -- and about to buy Texaco.
"Wall Street needed people like him. He was exactly like the Mellons and the Fords in bringing in a new era," Fadel Gheit, energy analyst with Fahnestock & Co said of Pickens' shake-up of the oil industry. "Shareholders are obviously more aware of their rights and potential," said Gheit. Over the past few years, oil companies have jumped back into the takeover game in an effort to become large enough to compete for highly-expensive, world-class developments.
Also, after a sustained rally in oil and natural gas prices oil companies are reporting record profits and looking for a place to put their cash. And with the memory of failed acquisitions of mining companies and other non-energy businesses still floating in corporate memory banks, they started to look around the oil patch.
As a result, Exxon and Mobil merged. BP and Amoco joined forces and then bought Atlantic Richfield. Chevron is about to buy Texaco. And Phillips is about to bolster its refining segment with the purchase of Tosco. The mergers are bloodless, said Gheit. "Hostile takeovers do not work anymore. You cannot win in a bidding war and companies have devised legal defences to make life more miserable for a takeover artist like Boone Pickens or Carl Icahn," he said.

Pickens, whose corporate raiding activities put terms like "greenmail" and "poison pill" into the lexicon of Wall Street, agrees. "It's hard to take over a company now that has a poison pill," he said, noting that today management's attitude tends more toward negotiation than spending shareholder dollars to fend off hostile takeovers.
Pickens, who celebrated his 73rd birthday and is now retired from the corporate raiding business, shuttles between his high-rise in Dallas and his Texas ranch. However, he still has his fingers in several corporate pies. One of them, Pickens Fuels Corp, owns over 30 natural gas fuelling stations in Southern California. "It's a naturalgas-driven market now. Most of the oil in the US has been found and so it doesn't have the same appeal. The opportunity is now with natural gas."
Shell's hostile bid for Rocky Mountain gas producer Barrett Resources was topped by a bid from Williams that was 60 % higher than Barrett's stock price the day before Shell launched its offensive takeover in March and over 20 % higher than Shell's revised bid.
"It's worth what you can sell it for," said Pickens. "But I think that with consolidation the acquired companies will get a premium. The acquirer is kind of in a spot where they can't grow unless it's by acquisition."

Pickens and his former United Shareholders Association takes a share of the credit for planting the notion of shareholder value firmly in the centre of management's mind as well lobbying the Securities and Exchange Commission for changes in how shareholders were treated.
"I think management has come a long way in the last 20 years," said Pickens. "Then you could pick up an annual report and look at it and it would never mention anything about shareholders. Today every annual report will say 'we are creating shareholder value' and that's good. "There's no question that if corporate America does well then America does well. Because that's where the jobs are, that's where the money is made and that's where the taxes are paid and that's what makes the economy go."