Current Status of Mergers and Acquisitions In the Petroleum Industry
Authors: Monteith Edward E. 
Published: December 2007

PREFACE
This paper will deal more with the art and types of mergers and acquisitions in the petroleum industry than with a statistical summary of the various mergers and acquisitions that have taken place since the last Petroleum Symposium on Economics. To recite a summary of even the larger acquisitions made in the last 5 years would merely repeat numbers published in various financial papers and journals. There have been frequent tabulations of mergers and acquisitions published in the oil journals and the list is indeed very imposing. The wave of acquisitions of independents by either larger independent companies or major oil companies from 1955 through 1965 has slackened appreciably in the last three years. The integrated oil companies and the chemical companies have absorbed many of the independents that were interested in selling out. Now the major oil companies are looking at other energy sources and at diversification as additional means of growth. The remaining independents have ingeniously adapted themselves to the changing times and have employed a system of merging capital and talents to compete effectively in areas of expensive deep drilling, in offshore exploration, and in foreign ventures. In the past several years independents have developed new techniques of raising risk capital for exploration.

ACQUISITION OF INDEPENDENTS WITH OIL PAYMENT FINANCING
From 1946 until 1956, a great exploration effort in the United States was stimulated by a high number of allowable days and increased oil and gas prices. Total new wells drilled peaked at 58,000 in this year and began to decrease from that year to the current level of 33,558 wells drilled in 1967. During this same period, several independent oil companies pioneered the purchase of producing properties under the "ABC" oil payment method so commonly used today. This method and variations of it required the increased confidence of financial institutions in petroleum engineering evaluations since oil payment loans are secured by property only. As allowable days decreased in the period from 1956 through 1965, many independents found it difficult to maintain their previous margins of profitability. These same independents also found it increasingly difficult to obtain new areas for exploration at a reasonable cost. During the later years of this period, faced with declining income and less attractive areas for exploration, many independents elected to sell out. Those who survived either accepted a lower rate of return on investment, reduced the operations and overhead, or survived on reserves found earlier. While it is very difficult to obtain an accurate figure as to the total dollar volume of acquisitions of independents made during the period from 1956 to 1967, the total exceeds $3 billion. Some of those classified as independents in this category would in fact be considered substantial integrated companies. As fewer independents have prospered in this highly competitive period, there has been a noticeable reduction in the number of acquisitions of the last several years. There simply are fewer independents available for purchase than there were. While there always will be a significant amount of independent drilling with attendant discoveries, extensions and reserves, certainly the long-term trend is in the direction of fewer independents. There are two significant reasons why competition has become greater for the independent both of which are related to money and technical capacity. The first reason is the increasing depth of exploration in the remaining unexplored basins and the second reason is the very high capital cost of offshore lease acquisition where the big new reserves are located.

MERGERS
While significant mergers had taken place prior to 1963, that year might be called a turning point in terms of stock swaps or acquisition by stock rather than the ABC method of outright purchase. The distinct tax advantage of a merger or acquisition for stock is that the transaction is tax free to the stockholders of the selling company at the time of the transaction. Thus, the stockholder does not have the problem of immediately paying a capital gain tax on the sale of assets and then the subsequent problem of reinvesting the cash in other securities.
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