Investors look forward to oil mergers, but don't forget the dividend

Wed Dec 10, 2014 9:43am EST
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* Oil price slump could herald return of mega-mergers

* U.S. shale players likely to consolidate intrabasin

* Distressed independents vulnerable to approaches

By Claire Milhench

LONDON, Dec 10 (Reuters) - Plunging oil prices look set to trigger another wave of industry consolidation after a decade when mega-deals were scarce, but investors want to see mergers that can squeeze out cost savings and only after a lavish dividend is paid.

Over the last 18 months Big Oil has faced shareholder pressure to prioritise value over volume - to improve their return on capital rather than focus on production growth targets. As a result, oil majors have been in disposal mode.

But with oil 40 percent cheaper since June, companies are likely to change tack and consolidate, with everything from mega-mergers to opportunistic buys of distressed shale oil producers on the cards.

"Anyone who doesn't think consolidation is going to happen must be mad," said Charles Whall, a manager of the Investec Global Energy Fund. "The exploration performance of these companies has been woeful. They have to replace reserves, and they're not doing that organically so they need to do it inorganically. But all we have seen are disposals."

There are signs that the industry mood music has changed in recent weeks, with a proposed $35 billion tie-up between oil services companies Halliburton and Baker Hughes.   Continued...