Conoco CEO Says Oil Producers Still Too Expensive for Takeovers

ConocoPhillips Inc. CEO Ryan Lance keeps track of about 100 oil companies that he might want to buy, hunting for bargains amid the worst rout in market prices since 2009.

He’s yet to find anything that’s priced right, he told reporters after speaking at the IHS CERAWeek Energy conference in Houston Monday.

“Beauty is in the eye of the beholders,” Lance said. “I don’t see the opportunity for our company there.”

Oil company valuations have not yet registered the full impact of the crude market’s collapse. The S&P 500’s Energy Index of 41 companies collective market capitalization declined 17 percent since late June to $1.59 trillion, even as US crude lost 47 percent of its value.

Oil drillers scrambling for cash to survive the downturn are being kept afloat by hedge funds, buyout firms and other investors seeking an entry in to an industry that generated record profits in recent years. More than $100 billion has been raised and set aside for energy investments by private equity firms like Blackstone Group LP and Carlyle Group LP, said Joseph Gladbach at Jefferies Group.

The flood of funding may prolong the downturn by propping up distressed producers and allowing them to keep pumping, according to Bloomberg Intelligence. But it may not save them for long, some industry executives say.

Graveyard Whistles

Oil companies that issue new equity and debt “are essentially whistling past the graveyard in the hopes that prices will soon recover,” Sheikh Nawaf Al-Sabah, chief executive officer at Kuwait Foreign Petroleum Exploration Co. said in a presentation at CERAWeek Monday. “Oil prices will not snap back to $100.”

The oil industry is entering the period of a “new normal,” when commodity prices will remain weak for the next couple of budget cycles, Al-Sabah said.

Producers that are “in denial” now may be ready to lower their price expectations and sell later this year as banks toughen lending limits and hedges that locked in higher prices begin to roll off, Al-Sabah said.

“The challenge we see from the first quarter of 2015, in which very few transactions were announced, is that sellers are slow to realize that we are indeed in a new normal,” Al-Sabah said.

Companies need to be ready to face “a lot of volatility” in the oil market for some time, said Stephen Chazen, CEO of Occidental Petroleum Corp., speaking at CeraWeek. “One can hope for $75 oil, but I think you need to plan for a lower oil price.”

For now, larger oil companies are still trading as if oil was selling for about $74 a barrel rather than $50, according to an April 16 report by RBC Capital Markets. Those values are too high for Houston-based ConocoPhillips, Lance said.

Pricing Recovery

“People are pricing in that oil is going to recover and I think that’s evident in the stock prices that are there today. But that can change at any given time,” he said.

U.S. and Canadian explorers sold about $12 billion in stock in the first three months of the year, in the sector’s busiest quarter for equity sales in eight years, according to data from Credit Suisse Group AG. Whiting Petroleum Corp., Encana Corp. and Noble Energy Inc. raised about $1 billion each selling shares in February and March.

“People are looking out a year to a year and a half and they’re seeing a recovery, and we’re starting to see that reflected in markets,” Scott Key, CEO of IHS Inc., said in an interview Monday. “After the correction, this is a long-term growth play. We will be struggling for decades to come up with enough supply to keep up with demand.”

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