Exxon would boost global primacy with Yukos stake
Date: 09-Oct-03
Country: USA
Author: Joseph A. Giannone
Today the world's largest oil company is poised to kick down that door as it carries on talks to acquire as much as 40 percent of newly merged YukosSibneft, now Russia's largest oil company and the seventh biggest in the world.
If accomplished, analysts said, the combination would increase pressure on rivals BP, Royal Dutch/Shell RD.AS and ChevronTexaco CVX.N to try to make similar investments in one of the world's major, and relatively untapped, sources of oil and gas.
"This is the end game for the majors." said Neil McMahon, a London-based energy analyst for research firm Sanford C. Bernstein.
For months there has been persistent speculation that YukosSibneft, formed in a merger completed last week, was in talks to sell equity stakes to Exxon Mobil and ChevronTexaco. The talks were publicly confirmed by Russian President Vladimir Putin.
Russia's uncertain regulatory and political environment could still discourage Exxon Mobil from making a $25 billion investment in YukosSibneft. Analysts say the Irving, Texas, company will walk away if it cannot negotiate a high rate of return for shareholders and if it cannot secure control over operations.
A good example of that firm approach came in June when Saudi Arabia scrapped plans for a $15 billion natural gas joint venture after two years of negotiations. In the end Exxon, which led a consortium of oil companies, demanded more gas access and a higher return on investment than the Saudis would allow.
Such discipline has helped Exxon to post higher returns on capital and attract a richer price for its shares versus its peers. Yet the Saudi impasse also has left Exxon Mobil in a position where it has $12.5 billion in cash weighing down financial returns.
"They have a financial capacity in excess of the needs of their indigenous reinvestment opportunities," said First Albany analyst Mark Gilman. Recently the company has been repurchasing its stock at a $6 billion per year pace.
ACCESS THE NEXT WAVE
Going forward, analysts say, the biggest oil companies need to gain access to high-growth energy regions such as Russia, the Middle East and east Asia if they hope to sustain long-term production growth and hold down drilling costs.
Over the past decade, technological advances helped extract more gas and crude from mature fields, while mega-mergers by Exxon, BP and Chevron generated big cost savings to boost profits. But these gains have largely run their course.
That is why an Exxon-Yukos transaction "would be as big as BP starting the consolidation wave in 1998," Bernstein's McMahon said.
Indeed BP, with its TNK deal, has already spurred increased activity by oil companies in Russia and other former Soviet states.
Royal Dutch/Shell RD.AS , the world's No. 2 oil company, recently announced plans to boost spending in Russia. Shell, a lead investor in a $10 billion Sakhalin Island project, said it would spend $1 billion on developing fields it owns in Russia's energy-rich Siberia.
The Anglo-Dutch group, along with France's Total TOTF.PA , in July also struck a scaled down, exploration-only version of its $5 billion core gas venture deal with Saudi Arabia.
Last week BP told investors it would invest more than $7 billion in the Russian oil sector.
And ChevronTexaco, which is also interested in acquiring a Yukos stake, on Wednesday announced its giant Tengiz oil project in neighboring Kazakhstan would quadruple output to 1 million barrels per day by 2012.
Still, if Exxon succeeds, it will leave slim pickings for its rivals.
Analysts say after YukosSibneft, major energy companies include LUKoil Holdings LKOH.RTS , gas giant Gazprom GAZP.MO and Surgutneftegas SNGS.RTS -- companies that are not eager to give up the reins.
"There's little room to maneuver" in Russia's oil sector, Bernstein's McMahon said. "If Exxon makes a move, it will be quite difficult for anybody else to get a control position with what remains."
