2007: A record year for oil mergers?

With oil prices high and money still cheap, the industry could see more deals than ever. Who might be bought?

By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Spring is less than six weeks away, but love is in the air again in the nation's oil and gas industry.

Fueled by last year's record highs for crude oil, low interest rates and a sea of private equity money, 2006 brought 485 mergers in the energy patch, the most in 16 years - deals worth a cool $82 billion, the fourth highest over that span.

And with prices still at historically high levels, and lots of cash-chasing deals, the oil industry will keep cooking with mergers in 2007, analysts and investment bankers say.

"I think it will be a record year for acquisitions," said Peter Gray, head of the energy division at KPMG Corporate Finance, the investment banking arm of consultant KPMG.

The big oil and gas companies, faced with aging fields and limited access to possibly rich new sources of oil in places such as Venezuela, Russia and Saudi Arabia, will eye smaller companies as a way to boost their oil and gas reserves.

Smaller firms that specialize in production or oil services will look for tie-ups to cut costs and boost production to bring more oil to market while prices are still relatively high. While crude has fallen more than 20 percent from last July's record, prices are still hovering near $60 a barrel - up from $10 in the late 1990s.

"You're going to need more rig crews, more drilling crews, more offshore people," said Steve Blumreich, president of BKD Corporate Finance, a Springfield, Mo.-based firm that puts together mergers. 'If you're able to identify the companies [being taken over], you could make 10, 15 or 20 percent return in a short period of time."

So with that in mind, what companies might be tempting takeover targets?

Think small

Hopes for a merger-of-the-century - an estimated half-trillion deal between BP (Charts) and Royal Dutch Shell (Charts) that would have created the biggest company in the world by nearly any measure - faded earlier this year with the departure of CEO John Browne, a big proponent of a possible merger.

Experts say given the current political climate in the U.S. - some senators have called for breaking up the integrated oil companies given persistently high energy prices - further consolidation among big U.S. oil companies like Exxon, Chevron (Charts) or ConocoPhillips (Charts) seems unlikely, although some smaller deals are not out of the question.

"Oxy, Murphy, they always come up in talk because they are mini-majors," said Neil Dingmann, an energy analyst at Dahlman Rose & Co., a New York-based energy investment boutique, referring to Occidental Petroleum (Charts) and Murphy Oil (Charts).

But when it comes to big players, more likely are link-ups in the natural gas sector.

With energy prices high and global warming on everyone's mind, experts say demand for cleaner burning natural gas will only grow.

"All domestic natural gas producers could be targets," said Fadel Gheit, an energy analyst at Oppenheimer, adding that he too thought 2007 could bring a record number of deals for the industry.

Gheit said big gas companies like Devon (Charts), Apache (Charts), Anadarko (Charts), XTO (Charts), Chesapeake (Charts) or EOG (Charts) could either buy one of their competitors or be targeted by a larger global firm, especially a foreign company like BP, France's Total or Italy's Eni.

Smaller companies like Range (Charts), Noble (Charts), or Pioneer (Charts) could be swallowed up by a larger competitor, Gheit said.

Dingmann at Dahlman Rose also named Devon and EOG as a possible target for a big oil company due to their sizable reserves. "We've heard stories from all the majors about lack of reserve growth," he said, adding he expects plenty of mergers in the energy services sector as well.

He said companies that generate lots of cash, like Nabors (Charts), a drilling specialist, and BJ Services (Charts), a provider of pressurized pumping, make ideal targets. And Atwood Oceanics (Charts), an offshore driller, would be better suited for a bigger company due to its small size, he said.

Dingmann said other companies in the offshore arena, like FMC Technologies (Charts) and Cameron International (Charts), firms that make equipment for subsea drilling and production, could make attractive targets, especially in light of General Electric's (Charts) recent announcement to pay $1.9 billion for Vetco Gray, a company that makes similar products.

Other producers ripe for takeover could be those that play in regional markets, said Craig Moyer, a partner at the law firm Partner, Manatt, Phelps & Phillips that specializes in energy M&A.

Having a regional focus enables companies to save on transportation costs and helps isolate them from nationwide disruptions in the energy infrastructure, such as when fog or hurricanes hampers operations in the Gulf.

Moyer said the refiner Holly Corp. (Charts), with refineries in Montana and New Mexico, gives it reliable access to crude from Canada and Mexico. He also credited producer Venoco's (Charts) solid reserves in good locations like California with making that company an attractive takeover target.

In addition to being bought by a competitor, there's also the possibility of a firm being taken private, like the rumored $15 billion attempt by Goldman Sachs and Morgan Stanley to buy electricity and natural gas provider Dominion Resources (Charts), recently reported in The Wall Street Journal.

"When oil is above $35 or $40 a barrel and demand is still very strong, there's a significant amount of capital available for the oil and gas business," said BKD's Blumreich.


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