Texaco-Getty linkup could be the first of many US oil mergers
The proposed $10 billion merger of Getty Oil Company with Texaco is being widely - but not universally - seen as the first in a series of dominoes. The proposed merger, announced late last week, is to come about through the purchase by Texaco of stock held by the Sarah C. Getty Trust, the majority stockholder of Getty Oil, and is seen by many Wall Street observers as an indication of a natural tendency toward consolidation in a mature industry.Skip to next paragraph
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Says Sandy Margoshes, an analyst at the Shearson/American Express brokerage firm, ''The investment game for 1984 is going to be the merger game.''
Demand for oil is ''lackluster,'' as another analyst puts it, domestic production is down, and reserves are low - and generally being pumped down faster than they are replenished.
Says Sal Ilacqua of the L. F. Rothschild, Unterberg, Towbin brokerage, ''We're just starting to see a wave of mergers and acquisitions, and we'll see a lot more before the industry comes out of the doldrums,'' which he suspects will not happen for another five years or so - unless a flare-up in the Middle East zooms oil prices up.
George Friesen, director of the energy group at Chase Econometrics, a forecasting firm, also expects to see a wave of consolidations over the next three years, as undervalued firms are snapped up by bigger ones. ''A year ago I would have said there would be no more big mergers, but if Texaco gets the go-ahead (from the US Justice Department), I would say we'll see more of this.''
But Dillard Spriggs, president of Petroleum Analysis Ltd., who speaks somewhat disparagingly of a ''herd instinct'' on Wall Street, is hesitant to project a trend to mergers. ''At times like this, an acquisition can serve as a catalyst to trigger other acquisitions.''
Mr. Spriggs says the proposed merger has come about because of circumstances peculiar to Getty - namely, Gordon Getty's dissatisfaction with Getty Oil management. In fact, Mr. Getty had negotiated a partnership with Pennzoil to buy back Getty Oil; Pennzoil has filed suit to attempt to block the Texaco-Getty deal.
The case of Superior Oil, another firm widely seen to be ripe for takeover, is similar: A major stockholder has signaled his unhappiness with management. ''Getty was on the block because Gordon Getty put it up there; Superior is up for grabs because of Howard Keck,'' Mr. Spriggs says.
He expects ''a few more consolidations'' but not many; he dismisses rumors of Union Oil, Sun, Phillips, and Kerr-McGee being ripe for takeover as ''almost positively just Wall Street talk.''
John Lichtblau, president of the Petroleum Industry Research Foundation, expects a ''slight'' trend toward mergers - ''but not gigantic supermergers. There just aren't that many companies where that's possible.''
Timothy Quaid, an energy analyst at F. Eberstadt & Co., concurs: ''I don't see anything more happening than the Texaco-Getty deal. A $10 billion deal catches the politicians' imaginations.'' Because Getty isn't such a strong presence in the retail gasoline market, there are not expected to be federal objections to the Texaco merger; Texaco is willing to divest itself of gasoline stations and refineries if necessary. But if Mobil, for example, were to try to acquire another strong retailer such as Phillips, ''I don't think it would be permitted'' from an antitrust point of view, he says.
He dismisses much of the discussion of mergers as ''chitchat'' among Wall Streeters with a professional interest in trying to generate excitement.
The significance for Texaco of the Getty merger - which would be the largest in US corporate history - is that Getty brings with it a sizable corporate ''dowry'' of oil and gas reserves. The easy oil finds have been found, and Texaco is buying reserves for half or a third of the amount it would cost to drill for them.
''If oil costs $10 to $20 or more a barrel to find, and they (Texaco) can buy it at $6, it makes sense,'' says Mr. Ilacqua of L. F. Rothschild. What is unclear, he says, and will remain unclear for some years, is what kind of return Texaco will get on this purchase. And other oil companies buying smaller ones for their reserves will be in the same boat.
Oil companies buying reserves are generally seen as trying to bring their cash flow into better balance with their reserves - and there is another way to do this, although it is a method seen as less sound. This is the royalty trust, set up by spinning off pumping operations into a separate entity. This is what T. Boone Pickens Jr. and his associates at Mesa Petroleum have been trying to force the management of Gulf Oil Corporation to do. Mr. Ilacqua sees a royalty trust as a logical step for a company that can't reinvest its cash flow prudently for a ''decent return,'' as he says Shell, for example, has done.
But Mr. Spriggs disagrees. It is not clear that oil companies with trusts spun off have increased or held their value as the royalty-trust theory says they are supposed to. He also questions the wisdom of cutting off a major revenue-producing arm of a company. ''A big-size company needs all the cash it's got to find reserves.'' He notes that Texaco is not buying Getty with excess cash burning a hole in its corporate pocket, but rather is having to borrow and issue new stock.
Mr. Quaid at F.Eberstadt calls the royalty trust ''very much a gimmick,'' and Mr. Lichtblau at the research institute notes that the trust benefits only the shareholders, without adding to a company's reserves.
There seems to be a trend toward fewer, but not necessarily bigger, oil companies. The impact on consumers is seen as minimal - they will have somewhat fewer choices of corner filling stations, and gasoline prices will be held down, or at least won't go up as fast as they might otherwise. There are still thousands of oil companies in the United States, and energy analysts note that the industry is still much less concentrated than, say, the automobile industry.