Dec 13 - International Herald Tribune

ConocoPhillips's $30 billion acquisition of the natural gas producer Burlington Resources, expected to be announced this week, would cap what has been a frothy year for energy deals. So far in 2005, Chevron has won Unocal, Chinese and Russian companies have reached deals from Venezuela to Kazakhstan, and even Warren Buffett has bought a power company.

But with the stepped-up battle for the world's energy resources, 2005 may pale in comparison with 2006, according to energy industry bankers and analysts. They say deals next year could rival the all- time records, set in the late 1990s when big energy companies combined.

Including the Burlington deal, announced energy mergers are projected to reach $367 billion this year, according to Thomson Financial data. Next year, high energy prices and a hunger for assets could push them above 1999's record of $383 billion, according to PricewaterhouseCoopers. That is not to say there will be a string of giant deals, like Exxon's $80 billion merger with Mobil, or BP's $62 billion deal for Amoco, which created global players in 1998. Instead, high energy prices and hunger for energy assets are expected to set off a flurry of smaller but still influential mergers. A variety of factors are driving the urge to merge. Demand for energy is increasing with the rapid industrialization of China and India. At the same time easy-to- extract natural resources like oil and gas are getting harder to find. Governments, concerned that the world's energy resources are rapidly shrinking but wary of pouring huge amounts of money into long-term investments, are hunting for operations already producing the energy. Meanwhile, most energy companies are sitting on piles of cash, thanks to higher oil and gas prices. The natural result is acquisitions, experts say. "Energy mergers are, and will continue to be, the hot topic because they present an irresistible cocktail of satisfying geopolitical, strategic aims, and the trading of a commodity, energy, where demand continues to grow," said Peter Roberts of Jones Day in London.

Companies, public and nationally owned, are embarking on a bit of a land grab, analysts say. Often they are reaching far afield to acquire gas, oil and coal fields and bidding for the companies that control pipelines and grids that might transport these resources.

This summer, this push led to an international dispute over Unocal, which agreed to be sold to Cnooc, a national Chinese oil company, until intense pressure from the U.S. government led Unocal to accept an offer from its domestic rival Chevron. Analysts predict that these types of bidding wars are going to become more frequent.

"This is not pure economics at play here," said Jonathan Grundy, a Morgan Stanley managing director who specializes in energy deals. "These are politically sensitive assets."

The world's top 20 energy companies are sitting on $75 billion in cash, estimates Rick Roberge of Transaction Services, a PWC energy subsidiary. Next year, Roberge said, these companies are going to be looking at "more exploration, as well as more international and more high-risk projects, requires bigger balance sheets." The further consolidation in the energy industry could look a lot more complicated than BP's purchase of Amoco in 1998, which set off the last flurry of mergers among oil giants. There will be "fewer large- scale corporate deals, and more asset swaps and purchases," said Craig Pennington, an oil industry analyst with Schroders. High oil prices are keeping the price tags of publicly traded companies beyond reach, making most big corporate mergers less attractive. In addition, big oil companies are starting to lose their edge to national oil giants, like Cnooc or the Russian company Lukoil, which are increasingly willing to pay any price for assets. Utilities, meanwhile, are looking at combining with the sources of the energy they carry, rather than watch their earnings be squeezed when their suppliers prices go up. China National Petroleum Corp. this year purchased Petrokazakhstan, a Canadian company with assets in Kazakhstan of more than $4 billion, by paying more than a 20 percent premium over the company's share price, beating out Indian and Russian national oil companies. Publicly traded oil companies did not stand a chance at the auction, said one person who worked on the deal and wanted to remain anonymous because he has relationships with some of the bidders.

"Price wasn't the main driving force behind that deal" for the Chinese company, he said. "In fact, it was almost irrelevant." National oil companies are also showing they are willing to pair together to win deals. Last week, China National Petroleum said it would join with Oil and Natural Gas, an Indian company, to bid for a stake in a Syrian oil company. These companies "are clearly playing by different rules," said Roberge, of Transaction Services. If you are a publicly traded international oil company, "you can't compete with the Chinese and the Indian" rivals, he said. "They just don't have the same demands" from Wall Street. Having said that, you can't give up on international projects. You're just going to have to be bigger to compete." Big oil companies are even finding hurdles to acquiring European state-owned energy companies, as local governments move to keep control of their energy supplies. When the Italian company ENI bought a stake in the Portuguese energy company Galp Energia five years ago, the price valued the whole company at 2.89 billion, $3.43 billion and ENI said it would be willing to buy more. Last week, a Portuguese investor bought a chunk of Galp that values the company at 5.15 billion, a 78 percent increase, to keep control of the company in Portugal. Despite the protectionism in some countries, analysts and bankers are already making lists of likely takeover and merger candidates, including BG Group and Centrica of Britain, Norsk Hydro of Norway, and even ENI. Even ConocoPhillips, before the Burlington deal, had been considered a target.

Some companies are so eager to do deals that finding a willing partner is not considered crucial. This fall, the Spanish company Gas Natural made a hostile $28 billion bid for the utility Endesa, a company twice its size, in hopes of creating a national champion that would be garner government support. So far, the deal has not gone through, but Endesa has also failed to get the European Union to step in to stop it. Deal making in the utility sector has also been busy. After a buying binge in the 1990s that created unwieldy conglomerates, utilities have fixed their balance sheets and are looking at the companies that generate power to hedge themselves against high prices. "Quite a few utilities are looking at or have acquired gas assets," said Herman Deetman, head of European utilities at UBS. There is "excess cash flow that needs to be deployed," Deetman said, and the companies do not want to give it back to shareholders.

Electrica Muntenia Sud, a small Romanian company that provides electricity to Bucharest, does not seem an obvious choice for an international bidding frenzy. But after the local government put a stake on the block this year, more than a dozen big energy companies eagerly pored over the books. Ten including giants like AES of the United States, Enel of Italy and E.ON of Germany have been short- listed for a 500 million deal.

"The reality is that most markets are already highly concentrated, so everyone is chasing the same small number of opportunities," said Grundy, of Morgan Stanley. "There's a sort of feeding frenzy. Shareholders are now asking where the growth will be coming from in the next 12 to 24 months. As companies look to find this growth it isn't surprising the M&A is back on the agenda."