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Energy Mergers Likely to Continue, Analysts Say

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BLOOMBERG NEWS

The world’s energy companies have announced mergers totaling more than $167 billion in the last 12 months, and the pace of buyouts is unlikely to slow, executives, investors and analysts said.

This week, Devon Energy Corp. said it would buy Anderson Exploration Ltd. of Calgary, Canada, for $4.6 billion. A month ago, Devon agreed to buy Mitchell Energy & Development Corp. for $3.2 billion.

In another deal this week, Santa Fe International agreed to buy rival Global Marine Inc. for $3.9 billion, making the combined firm the biggest company to rent offshore drilling rigs to oil exploration companies.

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The deals haven’t been particularly well received by investors, but energy company insiders argue that they’re taking a longer-term view while investors might be overly concerned about the short term.

The oil exploration industry is inefficient because too many small companies are competing, said J. Larry Nichols, Devon’s chief executive. Even with acquisitions, about 200 publicly traded companies remain in the field, he said, down from 400 in 1990.

“There’s no other industry that has anywhere near that number of publicly traded companies, and it’s hard to see a reason to have that many,” said Nichols, who predicted there will be five to 10 large independents within five years, plus a few smaller companies operating in niche markets.

Oklahoma City-based Devon, which has made at least one acquisition a year for the last 30 years, has found advantages in being bigger, Nichols said. For example, the $6-billion loan Devon is taking out to buy Anderson and Mitchell has an interest rate of less than 4.5%, Nichols said. “A small company can’t get anywhere near that,” he said.

Also, institutional investors prefer energy companies with safer prospects than small oil explorers can promise, Nichols said.

Yet Devon’s shares (ticker symbol: DVN) have been hammered in recent weeks. The stock fell 86 cents to $43 on Wednesday on the American Stock Exchange, the lowest price in more than a year.

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Santa Fe shares (SDC) also hit a closing 52-week low Wednesday, down 1 cent to $22.97 on the New York Stock Exchange.

Santa Fe’s slide has dragged down the value of its offer for Global Marine. When announced Monday, the offer of 0.665 Santa Fe share for each Global Marine share valued the latter at $16.82 a share, a 17% premium to Global Marine’s stock price last Friday.

On Wednesday, Global Marine (GLM) fell 10 cents to $15 on the NYSE. The offer now values the company at $15.27 a share. The stock had been as high as $34 a year ago.

The pullback in oil and natural gas prices this year has helped drive energy stocks lower, disappointing investors but whetting the appetite of acquisitive firms.

U.S. natural gas prices have dropped 72% this year because of weaker demand as the economy faltered. Crude oil prices are down 25% from their peaks reached about a year ago.

The concurrent slide in energy shares has made many smaller exploration companies, in particular, “a lot more attractive” for potential buyers, said analyst Bruce Lanni of A.G. Edwards & Sons Inc.

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High costs for finding new oil and gas reserves also are driving acquisitions. The most promising fields are in the least-accessible areas such as in the Arctic, or offshore, where drilling can cost billions of dollars.

Buying reserves is a surer bet than trying to find new ones, said Eugene Nowak, head of energy research at ABN Amro.

Mergers involving some of the biggest energy companies in recent years, such as the union of Exxon Corp. and Mobil Corp. in 1999 to form Exxon Mobil, and Chevron Corp.’s pending $46-billion deal for Texaco Inc., also are spurring more consolidation among smaller exploration and drilling firms.

Large oil companies want as few suppliers as possible, giving them more negotiating power over such things as rig rental rates and relocation of equipment.

“In the contract-drilling business, size and critical mass make an enormous difference in being able to deal with these volatile markets and the capital costs that you incur when replacing” offshore rigs, said Matt Simmons, president of Houston-based energy investment bank Simmons & Co.

Among smaller energy firms, Kerr McGee Corp., Conoco Inc. and Williams Cos. this year have spent almost $11 billion on takeovers. In early February, Phillips Petroleum Co., the No. 6 U.S. oil company, agreed to buy refiner Tosco Corp. for $9 billion.

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