As much as everyone is freaking out over the price of oil and OPEC's efforts to kill the competition by keeping production levels steady, we seem to forget that the consortium of oil-producing nations has pulled this move before. It did it in the 1980s, and it was the straw that broke the Soviet Union, and then again in the late 1990s when the world was seemingly awash with oil. As a result, OPEC shakedowns, like the one we're seeing today, normally lead to major sweeping changes across the entire industry.
When you look at Big Oil, the last years of the 20th century shaped many of today's oil titans thanks to a handful of massive mergers and acquisitions, and the conditions that produced many of those deals are developing again. Let's look at why there were so many massive oil mergers between 1998 and 2000, and whether a few companies might be ready to make another massive deal.
Wonder Twin powers activate! Form of massive oil company
The oil price collapse from late 1997 to early 1998 caught many oil companies with their pants down. The previous several years were dominated by massive global growth. The world's largest economy, the United States, was ripping off consecutive years of greater than 4% growth and the "Asian Tigers" were growing at better than 7%. Global oil demand had grown more than 20% from 10 years prior and supplies were struggling to catch up.
This massive surge in demand caused oil prices to almost double between 1994 and 1996, and OPEC thought its members could all produce at maximum capacity and the price of oil would remain comfortably above $31 per barrel (inflation-adjusted dollars).
Shockingly, just like every other time investors and companies thought oil prices would remain high in perpetuity, something happened. The Asian Tiger phenomenon was replaced with the Asian financial collapse that almost triggered a global recession, and all that production from OPEC and non-OPEC sources overwhelmed market demands, leading to -- surprise, surprise -- an oil price collapse.
As you can imagine -- or perhaps remember -- this two-year plunge scared the bejesus out of the larger oil companies like Exxon and Chevron (NYSE:CVX) as they realized they were losing market share to national oil companies and that their portfolios had some major holes. As 1998 rolled around, a massive wave of mergers and acquisitions took the energy space by storm:
- August 1998: BP (NYSE:BP) bolstered its presence in the U.S. and its refining and marketing segment by acquiring Amoco for $48 billion.
- December 1998: Exxon -- the cost-cutting capital allocator with a strong U.S. presence -- merged with Mobil Oil -- with its massive international quiver of projects and major inroads into post-Soviet Russia -- to form ExxonMobil (NYSE:XOM) to the tune of $80 billion.
- December 1998: Total (NYSE:TOT), needing to diversify away from its focus on exploration and production, bought European refining giant Petrofina for $11 billion.
- October 2000: After several attempts and months of negotiating, Chevron finally reached a deal to buy out Texaco in a $36 billion stock deal.
Those deals gave these companies much greater capacity to consolidate projects, reduce expenses, and more prudently allocate capital expenditures. Alongside some other factors, they also helped produce market-crushing stock performances for these companies over the subsequent decade.
Right back to where we started
Fast-forward to today. The price of oil is six months into its slide to less than $50 per barrel, and energy companies are slashing capital expenditures; realizing that expensive development projects they embarked on several years ago do not look as lucrative as they once did because they were designed with a much higher oil price in mind. Furthermore, OPEC seems just as ambivalent about adjusting its output as it did in the late 1990s, suggesting the greatest decline in output will come from other sources like these Big Oil projects.
Just about every Big Oil player has a decent-sized platform of potential reserves, and their downstream assets such as refineries and chemical manufacturing facilities are getting significant attention since feedstock costs for these plants are falling through the floor. The one glaring hole in portfolios, though, is that those potential reserves are almost all tied up in those long-tail development projects that take billions of dollars and several years to bring online. If OPEC refuses to yield on prices, then many of these projects could be delayed or scrapped. Without these projects, though, there isn't much in Big Oil's asset portfolio to make up for the natural decline of existing wells, which would result in declining production and revenue.
These companies, therefore, need sources of oil that can be developed quickly (and hopefully cheaply) while they work to bring these big projects online. Today, shale and tight oil in the U.S. is pretty much the only such opportunity. These quick-turnaround projects are becoming easier and cheaper to drill, and with Big Oil's ability to shelve drilling for when it needs it, it could be a powerful combination.
What a Fool believes
Yes, some of these Big Oil players have tried the shale game already, and some have failed miserably at it. A large part of those missteps involved the simple fact that many of the U.S. independent producers beat them to the game and bought all the prime acreage. With prices as low as they are today, and with most of the Big Oil players in a financial position to do something big, gobbling up some of the larger independents in the U.S. could be an immense opportunity, one that has not really presented itself since the 1990s.