HEARD ON THE STREET: Oil Majors' Search For Growth Is Costly

15th Jul 2010 17:40

By Liam Denning A DOW JONES COLUMN It would be funny if, as news reports suggest, Apache Corp. (APA) ended up buying BP PLC's (BP.LN, BP) Alaskan business. Having also bought BP's North Sea Forties field in 2003, Apache would then own the two assets that long ago rescued the British oil major from another disaster--the nationalization of its Middle Eastern reserves. BP would hardly laugh. Quite apart from the circumstances of the current crisis, selling to Apache would expose an underlying problem dogging not just BP, but other oil majors. Apache is the oil world's yard sale specialist. Take that old Forties field. The year before BP sold its 96% stake, Forties produced 52,000 barrels of oil a day, about a 10th of its 1970s peak; a seeming case of terminal decline. In 2009, Apache wrung more than 60,000 barrels a day from Forties. Apache uses techniques like sophisticated underground mapping and incremental drilling to find untapped reserves in fields like Forties, as well as regions ranging from the Gulf of Mexico to Egypt. That is great for Apache, whose stock has outperformed the majors' by 407% on average since the start of 2000. Similarly stock of Occidental Petroleum Corp. (OXY), which also wrings value from older fields, has outperformed the majors by 617% on average since the start of 2000. Both beg the question as to why the majors don't realize this value themselves, instead of selling out to smaller companies. After all, the majors also have experienced engineers and access to technology. There's a clue in the moniker "Big Oil". Forties represented just 2.5% of BP's 2002 oil production and the company was no longer prepared to keep investing in it, seeing better opportunities elsewhere. There's nothing inherently wrong with redeploying capital in this way. But there are two problems here. First, in a study published last year, analysts at Sanford C. Bernstein concluded that, overall, the majors were redeploying profits from older, high-margin fields into more expensive, highly-taxed reserves in regions like Russia. In addition, they have arguably neglected genuine exploration in favor of buying into existing large reserves, which is less risky but is also less profitable. The majors, behemoths already, still seem largely to want to grow. Yet their scale makes this ever harder to do profitably. Moreover, BP's woes have shown that while its size means it can absorb a major disaster--at least for now--it didn't help it avoid one. Perhaps BP should take a page from the playbook of ConocoPhillips (COP), which is actively shrinking itself to enhance returns on investment. It's no coincidence Conoco is the best performing stock among the majors this year. Selling out of Alaska would help BP live to fight another day. The question for investors is, in its current form, should it? (Liam Denning joined The Wall Street Journal from the Financial Times, where he wrote for the Lex column. Previously, he was an investment banker at Goldman Sachs. He can be reached at 212-416-3618 or by email at [email protected]) (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) (END) Dow Jones Newswires July 15, 2010 12:40 ET (16:40 GMT)