Crude oil and natural gas prices are tumbling, drilling costs are on the rise, and the energy sector seems headed for a profit squeeze. Not a pretty picture for investors. Or is it? A wave of mergers is hitting the oil patch, promising tidy payoffs if you play the game right. "The pain of lower prices, even if it's temporary, will accelerate the pace of consolidation," predicts oil analyst Phillip Pace of Morgan Stanley Dean Witter Discover.
The value of oil and gas mergers has risen 62% in the past two years, with $32 billion in deals announced in 1997 and lots of action in '98. On Jan. 26, Union Pacific Resources offered $13.65 a share for Canada's Norcen Energy Resources, a 23% premium over Norcen's stock price. That same week, explorer Rutherford-Moran put itself on the block.
Who's next? One possible target is Oryx Energy. Its shares closely track energy prices and are off 17% from their '97 highs. That makes it "a good consolidation candidate for a larger oil company," says Aliza Fan, an analyst with John S. Herold in Stamford, Conn. Oryx' Gulf of Mexico interests also make it attractive to the foreign companies rushing into that U.S. hot spot.
Two others often named as prey are Nuevo Energy and Ranger Oil, which specialize in viscous heavy crude. Nuevo gets strong cash flow from its California wells and has hot new prospects in the Congo and Ghana. Ranger, with lots of potential reserves in Canada, has seen shares fall 31% since Nov. 6. But Canadian and U.S. heavy-oil producers have been buying one another like crazy. Last year, Texaco picked up Monterey Resources, and PanCanadian Petroleum bought CS Resources. Either Nuevo or Ranger would be a nice match for Gulf Canada Resources, which lost its bid for CS Resources.
The takeover game is not for the fainthearted. Some analysts, for example, doubt whether Rutherford-Moran is really set for marriage. It has $150 million in debt, operating losses, and lacks the cash to pursue its drilling program. Another deal with questions is United Meridian's $2 billion stock swap with Ocean Energy in December. United's shares are 17% below the price they traded just prior to the merger agreement, and investor Michael Price, whose Franklin Mutual Advisers funds own 8.6%, thinks United should put itself up for sale. In the current merger frenzy, yesterday's predator can quickly become today's prey.