Mergers Point to Solid Future for Oil Industry
“This is not an endgame for a declining industry but a renewal, the making of a new industry,” says John Browne, group chief executive of BP Amoco and the man who started the oil industry’s latest round of consolidation last summer with British Petroleum’s $48-billion acquisition of Amoco.
Emboldened by his example, Exxon moved last winter to acquire Mobil in an $87-billion deal that is pending completion. BP Amoco reached out again last month to acquire Atlantic Richfield Co. for $27 billion. And now Chevron Corp. is in merger talks with Texaco Inc.
Browne’s renewal talk notwithstanding, most analysts see a Darwinian selection of strong companies devouring the weak in an industry unable to control its profits or its destiny in a time of low crude oil prices.
And the analysts have a point, of course. One reason that leading oil companies have been resorting to mergers is a desperate attempt to cut costs and boost earnings and thus attract support from investors who had been avoiding oil stocks.
The strategy has worked. Stock prices of companies involved or rumored to be involved in mergers have risen.
But Browne’s view is also right and stems, moreover, from the greater truth that the oil-and-gas business is not about to shrink into three or four giant companies before disappearing in a black hole like a burnt-out star.
Rather, the industry is on the verge of new global opportunity. The present takeover wave gives us an indication of that future--and also holds lessons for all businesses and investors in what a company needs for long-term success.
Browne, 50, articulates the outlook for an industry he has worked in since he was 18.
“People around the world want a better life, and we must give them the means, in terms of energy, to that goal,” he says. “Equally, people have the right to a cleaner environment. So we must give them a way to use hydrocarbons differently.”
That promises what he terms “a preferential use of natural gas as a very efficient way to generate electricity.”
“In gasoline and diesel fuel, there will be very different products in the next five to 10 years. Little or no sulfur will remain in diesel or gasoline,” says Browne, who is in Los Angeles this weekend to receive an award for environmental contributions.
His stress on natural gas is significant. In combining with Amoco and with Arco, BP is acquiring large reserves of natural gas, the clean-burning fuel that generates much of California’s electricity and is widely used for home heating and cooking.
With the inclusion of Arco, Browne points out, BP Amoco will become the world’s third-largest holder of natural gas, after Russian state company Gazprom and Exxon, which will also increase its gas holdings with the acquisition of Mobil.
Browne foresees greatly increased use of natural gas to generate electricity in China and other developing countries, where “there is a desire to find a path to development which does not pollute the environment.”
The growing concern about global climate change is “a moment of great opportunity” for the energy business, says Browne, who holds a physics degree from Britain’s Cambridge University as well as a master of science degree from Stanford’s Graduate School of Business.
He is unusually outspoken for an oilman in combining a traditional forecast of 2.5% growth in global oil and gas use per year with acknowledgment of the need to adapt to requirements for air and water quality. But he is only articulating forthcoming changes in the industry that have already led to the merger wave and higher stock prices.
The merger wave is creating companies such as BP Amoco, which with Arco will grow to more than $80 billion in annual revenue and roughly $200 billion in total stock market value. That size and scope are needed to patiently develop vast markets in India and China while earning profits day to day in operations elsewhere.
The mergers also create companies that can sharpen their focus--and profitability--by choosing projects that promise high returns while selling off activities yielding lesser returns. Those opportunities are “why investors have lifted the market value of the supermajors,” says Douglas Terreson, the Houston-based Morgan Stanley analyst who coined the term “supermajor.”
Not all the business will go to the big guys, however. The coming increase in use and value of natural gas means that smaller companies will have key roles to play, says Albert Anton Jr., a partner in Carl H. Pforzheimer & Co., a New York-based investment firm that has specialized in oil and gas research for 90 years.
He cites Kerr-McGee Corp., a medium-sized, Oklahoma City-based firm that is a 50-50 partner with BP Amoco in drilling for natural gas in deep-water areas of the Gulf of Mexico.
Clearly, the industry is changing, not retreating. And a really interesting point for anybody in business to think about is why BP, Exxon and Chevron earned the opportunity to be the industry’s leaders and Amoco, Arco, Mobil and perhaps Texaco have become historic footnotes.
The answer is preparation, along with some historic luck. The winners conserved their capital over most of this decade and were ready when opportunity arose. For example, “Exxon restructured its operations and strengthened its balance sheet,” notes Joseph Tovey of Tovey & Co., a New York investment bank that specializes in energy issues. Chevron, with roughly the same annual revenue as Texaco, has double Texaco’s profit and stock market value.
BP restructured. In the late 1980s, when the British government sold the last of its BP holdings to the public, the company was overstaffed and burdened by debt. But in short order, Browne’s predecessor as chief executive, David Simon, cut headquarters staff from 3,000 to 380 and reduced debt by more than $1 billion a year.
Browne, who became chief executive in 1995, diversified BP’s oil and gas ventures. And he continued to develop a management system in which 140 business units worldwide report to only nine senior managers in London.
“We are not a traditional, centralized organization,” says Browne, who received a knighthood for his efforts in turning around BP.
Browne last week visited Arco operations in Southern California, including the refinery in Carson. The Arco acquisition, expected to become final after a shareholder vote in September, was a long time in coming for BP. In the late 1980s, the British firm contemplated buying a Unocal Corp. refinery in Long Beach just to have a West Coast terminal for processing its Alaskan oil. But overstretched BP didn’t buy at that time.
Now the outlook for BP Amoco-Arco operations is for greater development of natural gas holdings in Alaska.
Meanwhile, for his company and his industry, Browne wants to increase public awareness of the oil business’ technological accomplishments and capabilities, from computerized study of the Earth’s subsurface to chemistry and pollution control.
“We in oil employ more scientists and technical personnel than any industry, save information,” Browne says. Public recognition of that fact can help attract talented people to the industry, as well as generate higher investment values.
Browne need only be patient. Public recognition will come as global energy needs and environmental change create opportunities for an industry that has far better prospects in the next decade than conventional opinion--and the stock market--now give it.
James Flanigan can be reached at jim.flanigan@latimes.com.
