Oil’s scarcity has become Wall Street’s gain

April 14, 2010

Wall Street has always loved the fees generated by deal-crazy oilmen. But the recent flurry of energy industry hook-ups — $130 billion so far this year and counting — is once again making them the most valuable clients for the world’s merger advisers. Bankers in the oil patch are likely to remain in high demand even if energy prices stumble.

Oil and gas producers often jostle with financial services firms for the top sector spot in merger activity. Pricey oil, at over $80 a barrel today, may be helping give the energy sector the edge by boosting valuations. So far this year the industry spawned 46 transactions worth $500 million or above, racing past financials with just 31 deals, according to Thomson Reuters. But resurgent energy prices are only part of the story. After all, natural gas — which has been at the epicenter of much deal-making — still languishes at less than a third its 2005 peak.

Instead, the recent flurry of activity is due mainly to a race to lock up resources. With 87 percent of the world’s oil reserves controlled by foreign governments or national champions, big private energy companies are finding it harder to replace lost production. Between 2002 and 2008 Exxon Mobil managed to replenish just 39 percent of production through fresh exploration. BP and ConocoPhillips did only slightly better at 57 percent and 49 percent respectively. This has put the burden squarely on deal-making.

Merger advisers also owe a debt of gratitude to China, which is attempting to feed surging domestic demand for energy. Acquisitions by Chinese national oil companies made up nearly 40 percent of the value of deals outside the United States in the first quarter of the year, according to IHS Herold. Bidding pressure from deep-pocketed Chinese companies — such as Sinopec’s  purchase of a chunk of Conoco’s business in Canada’s oil sands this week — pushes up the value of deals, to the delight of bankers.

In addition, as old-style cheap oil gets harder to find, once-fringe resources are attracting ever greater attention — including gas shale, oil sands and sub-salt oil. The greater technical challenge of extracting these hoards helps explain the recent wave of deals in the oil services sector, including Schlumberger’s pending $11 billion takeover of Smith International.

The widening contango in oil — with near-term contracts trading at a discount to longer dated ones — may point to an ominous glut. But with so many broad trends driving energy deals, even a retreat in the price of the black stuff looks unlikely to end the party for bankers.


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These changes in fossil fuel supplies are going to make American life profoundly different. Shortages of paints, fertilizers, diesel, polyester anything..Among other things, buying and trading locally will be the norm. Exporting and importing goods will go by the boards. Even intra-state commerce and travel will decline. The attempts to make use of diminishing and marginal oil sources already sicken the Planet and result in bankrupting “great games”. The next wars over oil will be of unimaginable environmental, social, fiscal savagery..in the meantime, money will be made..this will be the sociopath’s fondest dream come true..and a normal person’s nightmare..

Posted by gramps | Report as abusive

In spite of powerful environmental pressure, will the consumption of old-style cheap oil continue to increase? Will any reduced consumption in the West be outweighed by increases in China? Will the resulting increased scarcity of old-style oil push its price up and make the once-fringe resources increasingly more competitive? Will the more costly alternate sources of energy then also become more competitive? Big money seems to be betting on profitably exploiting the fringe sources of fossil fuels, rather than the eventual dominance of wind, solar, wave, and other alternatives. Should we listen to big money and follow their lead, or hope for something better? Just thinking out loud.

Posted by Trouble | Report as abusive

The great Game of Oil seems to towards Chinese comapnies , it has all it needs for demand, in terms of hungry populace and deep rooted pockets.

Posted by Ismailtaimur | Report as abusive

Great article and comment,we shoud see more of you !

Posted by Ghandiolfini | Report as abusive

So on balance, would you say the oil companies are in any way sorry about that Chinese tanker landing on the Great Barrier Reef? Because from this article I can’t help feeling they made, indirectly or otherwise. a buck or two off of the incident. For stuff that’s supposed to be in short supply, they sure keep a lot of it in tankers going nowhere.

Posted by HBC | Report as abusive

[…] Thomson Reuters published last year an interesting article about the issue and how the bankers from the energy sector are adjusting greater gains despite the shortage (actually, because of it). […]

Posted by Witnessing the last drop of Black Gold « The Oyster Project | Report as abusive