Credit crisis and cheaper crude to boost oil M&A

By Tom Bergin

LONDON (Reuters) - The credit crisis will spur more takeovers in the oil and gas industry as cash-rich oil majors and utilities pounce on small and mid-cap companies whose shares have been hit hard as they struggle to fund developments.

Oil majors such as Exxon Mobil (XOM.N) and Royal Dutch Shell (RDSa.L) will likely use the crisis to accelerate their strategic push into North American gas production and the Canadian oil sands, bankers and analysts said.

Similarly, utilities like Germany's RWE (RWEG.DE), France's GDF Suez (GSZ.PA) and Britain's Centrica (CNA.L), which have long sought to produce more of the gas they retail, are also predicted to take advantage of lower asset prices.

"We would expect there to be more consolidation," said Karl Nietvelt, director of oil and gas at S&P. "Prices are indeed very cheap".

Recession fears have halved the price of oil since July, when it topped $147/barrel. The drop has hit share prices across the sector but small and mid-size oil and gas exploration and production (E&P) firms have been among the hardest hit.

This is because the E&P players are more leveraged to crude than the oil majors, which have refining, chemicals and retail units, and because, with low production levels or none at all, the E&P firms are more reliant on debt funding.

Devon Energy President John Richels said earlier this month he expected consolidation among mid-size North American E&P players, typically worth between $5 billion and $20 billion, which have expanded rapidly in recent years.

Thierry Bros, analyst at Societe Generale in Paris, said the majors may snap up such firms or their assets to help address their own failure in recent years to grow their reserve bases.