Big-cap Energy Companies To Buy-out The Smaller Firms Due To A Competitive Landscape And Increased Regulator Scrutiny On Mega-cap Mergers; Citigroup Director Gauges Investor Interest In The Sector
January 4, 2011 - The Wall Street Transcript has just published 2011 Best Green Investments: Alternative Energy And Socially Responsible Stocks offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Faisel Khan is a Director at Citigroup Investment Research and Analysis, where he covers the integrated oil, refining and integrated natural gas industries. Prior to joining the firm in February 2005, he worked for six years at Credit Suisse First Boston, first in investment banking and later as an Equity Research Analyst following the integrated natural gas and gas distribution industries. Mr. Khan was ranked number two in the natural gas sector in both the 2007 and 2008 Institutional Investor surveys. Mr. Khan graduated from the University of Pennsylvania with a B.S. in engineering and a B.A. in economics, with minors in mathematics and actuarial science.
TWST: I guess natural gas is more onshore, so less of a problem.
Mr. Khan: Yes, right now it's still very much onshore. Shale gas is a growing source of supply. New shale sources could add another 40 Bcf per day of new supply over the next 10 to 15 years. You've heard about some of the states on the Eastern Seaboard wanting to open up their shores to natural gas production. There is a tremendous amount of natural gas in Alaska, too.
TWST: You mentioned consolidation in the industry. Will we see that again, with companies' current cash flows?
Mr. Khan: I think there are projects that the majors can invest in. I think they want to invest, and they are investing. You have seen Exxon ramp up their spending program, and Chevron has a huge backlog of projects they are working on. There is no shortage of projects to work on. So I don't think we are going to see any consolidations in the majors any time soon. But I think that we could see selective transactions, like the XTO (XTO) deal with Exxon. It's possible we could see that. We've seen Shell (RDS-A) go after Arrow (AOE.AX) with one of the Chinese oil companies, and so I think we will see these selective acquisitions take place. The bigger guys buy smaller guys. Ten years ago, we saw bigger guys merge with each other. There is no reason to do that today. It's a competitive environment, and I don't know how that would be viewed by the regulators.
TWST: As you talk with investors, do you find they're interested in this space?
Mr. Khan: I think a lot of investors really had been focusing more on the independent oil and gas space because I think they believed that's where you could get the most bang for your buck. The smaller companies are more transparent; it's easier to see. You are talking about looking at companies that are $10 billion to $50 billion of market cap versus companies that are between $100 billion and $300 billion in market cap. It's a lot easier to look at that the smaller companies and figure out where the inflection points are, where the discoveries could be made and how production growth is trending. It's a lot harder to see that with the majors, and they have done themselves no justice by effectively taking capacity out of the system from 2002 to 2008. None of the majors really met their production growth targets during that time frame. And so people are very skeptical of whether these guys can actually grow production in this next decade because the last 10 years were somewhat bad. But in the 1990s, these guys grew.
TWST: And investors want some assurance?
Mr. Khan: Yes, investors obviously are looking at the next 12 months, and so that's as far as people really want to see. And it's very difficult to look out past 24 months in this sort of market, where the stocks are moving around 10% in a day. XOM can keep production flat without the XTO deal, and they can grow production 4% this year. XOM has plenty of projects that are under construction, that come online in the next few years, that will keep production flat and maybe grow at low single digits, excluding XTO. In the end, it's very difficult to get Exxon to grow production more than 2% or 3% a year. It's a possibility, but it's hard to do that. It is a very large company, so it's moving that snowball up the hill that becomes tough.
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