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BusinessWeek: January 10, 2000 |
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Industry Outlook 2000 -- Manufacturing
Energy
Prices will still be important to those returns. In 1999, the industry received unexpected relief when prices climbed out of the doldrums to their current $25-per-barrel range, thanks to OPEC's decision to make big production cuts--and largely stick to them. Although pricing is difficult to predict, 2000 should be a good year. Inventories are falling; the oil-guzzling economies in Asia are picking up; and OPEC is showing greater resolve than ever before. If North America and Europe experience cold winters and OPEC continues to be stingy, prices as high as $35 a barrel are possible, say some analysts. But most feel that a range of $18 to $21 is more sustainable. As evidence of industry thinking, Fergus MacLeod, Managing Director of Deutsche Bank Energy Research in Edinburgh, says the recent $550 million sale of a North Sea property by Repsol to Kerr-McGee Corp. was valued on an $18-per-barrel basis. Even $18 oil is good news for companies that suffered through $14 average prices for 1998 and $16 in 1999. Deutsche Bank expects a 20% jump in oil company profits this year. Paradoxically, it was 1998's low prices that galvanized the industry, forcing companies into megamergers that have dramatically reduced costs and headcount. Scale brings rewards: The world's four largest companies--Exxon Mobil, BP Amoco, TotalFina, and Royal Dutch/Shell returned an average of 31.5% to shareholders over the last 12 months, compared with 8.7% for the next six companies. The deals also shifted the balance of power away from the U.S., where the industry had been centered. Three of the four largest oil companies--BP Amoco, TotalFina, and Royal Dutch/Shell Group--are based in Europe. New dealmaking may move in different directions. A lot of the obvious megamergers have already gone through, and regulators may be reluctant to allow more--unless renewed price collapses seem to warrant it. U.S. authorities, for instance, have put roadblocks in the way of BP Amoco's proposed purchase of Arco. MacLeod of Deutsche Bank thinks that if prices remain relatively high, the big companies could start going after smaller independent exploration and production companies, such as Lasmo PLC and Enterprise Oil PLC in Britain and Anadarko Petroleum Corp. in the U.S. Whatever they buy, companies will be shuffling assets to gain greater efficiency. Many will concentrate their activities on specific markets, regions, or basins. By swallowing Arco, for example, BP Amoco would gain a strong position on the West Coast of the U.S. The big mergers in particular will lead to huge asset sales as companies re-tune their portfolios and move to satisfy regulators. Meanwhile, American companies will continue to move investment and production out of the U.S., where costs are rising because the easy oil and gas deposits have been found. In preparation for these shifts, countries as well as companies will have to make themselves competitive--or they won't get the investment dollars. Many oil execs are watching Kuwait, which is finally liberalizing rules that have kept foreign companies out. Iran, too, is courting industry, and can probably expect increased investment in the coming years. Russia, on the other hand, badly needs investment dollars to sustain production. But its poor track record in protecting investors, such as BP Amoco, could turn off other multinationals. Assuming prices remain strong, companies and oil-producing countries should do well next year--but only if they make the smart competitive moves. Return to top | |
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  Return to top TABLE Positives and Negatives POSITIVES -- Demand for petroleum is rebounding, especially in the oil-guzzling Asian markets. -- The oil industry's merger wave is slashing spending, largely because of a need to beef up shareholder returns. NEGATIVES -- OPEC has a poor track record of managing production. -- Western industrial powers are beginning to get restive about high energy prices. -- U.S. companies will move more investment and production offshore. Return to top |
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