That takeover offer, which might yet be topped, tells investors a lot about the state of the energy industry – and the capacity of all sections of the market to move into a feeding mood.
Big Oil, always on the lookout for acquisitions, is a prime suspect though for a particular reason. It is failing to discover sufficient petroleum to replace what it produces and must buy reserves or risk shrinking.
Small and medium oil, on the other hand, is riding high on the fat prices caused by Big Oil’s failure to discover.
It is the rising tide of cash that first caught The Slug’s attention. But the Peabody raid on Excel also triggered another thought. This is an American coal company diving into Australia because it wants to get greater exposure to customers in Asia. And the common threads that link this coal deal with the oil market is Asia and its appetite for energy, and the cash mountain growing daily in all energy businesses.
So far, most of the energy deals with Asia, especially China, have been reserved for the big boys such as Woodside’s sales of liquefied natural gas.
But energy is energy and whether it’s coal or liquids, there is undoubtedly scope for increased exports into the Asian market and increased exploration in the Asian region.
While no one can dispute this hypothesis, there is a catch when it comes to the small end of the Australian oil patch – size. Most Aussie explorers and producers are tiddlers. They simply lack the size to think far beyond a bit of peripheral drilling around the edges of the big oil pools such as Bass Strait, the Cooper Basin and the North West Shelf.
Why, and this is The Slug’s question of the day, should that always be so?
Right now, with record volumes of cash flowing in oil producers of all sizes, there is a perfect opportunity for a bit of corporate consolidation to create one or two bigger oil companies by merging several smaller firms.
Midcap companies such as AWE, Roc, Hardman, Tap, Arc, Amadeus and Beach are posting report earnings, but each on its own lacks the substance to move to the next level of the industry.
That problem is easily fixed. All it needs is an ego strong enough to see itself as the leader of business that wraps up several of the small producers to create one large producer, which will have its foot on a swag of acreage and a pile of drill-ready targets.
The key to all this is the cash and the high share prices we see across the energy sector. While some outside observers might see the high prices as a deterrent, right now is actually the perfect time for corporate activity simply because there is the currency to deal, whether it’s the folding stuff itself or high-priced shares, which make for ideal share-swap offers.
Peabody has recognised that the time to move is now because Asian demand will ensure that energy prices stay high in the long term and it wants to retain its status as one of the world’s biggest coal producers – and it has the cash to splash out to see that this happens.
It’s a similar story among the oil stocks where the flood of cash will ensure that it’s not long before we see a resumption of corporate activity – all it needs is a big ego to start the ball rolling.
