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Valuation of the Oil and Natural Gas Industry

Posted on: Tuesday, 6 December 2005, 03:02 CST

By Dolbeck, Andrew

The oil and Natural Gas Industry includes establishments primarily engaged in exploring for, extracting, and producing oil, natural gas, and related products such as hydrocarbon liquids from coal. Activities in the industry include drilling, oil and gas well operation and maintenance, the operation of natural gasoline plants, and the gasification, liquefaction, and pryolysis of coal. The industry also includes firms that provide support services to the exploration and extraction sector, such as oil well development services. The distribution of oil and gas through pipeline networks is covered by the transportation and public utilities industries.

Sustained high prices for fuel and energy have allowed companies in the oil and gas production sector achieve significant profits over the last year. In 2003, the average price of crude oil was $31 per barrel. The average price has exceeded $60 per barrel for much of 2005. While prices will likely remain high in 2006, it is less certain they will remain at such drastically elevated levels over the longer term. If ongoing high fuel prices strain the global economy, demand for fuel can be expected to drop, and fuel prices will probably decline in response.

Number of Public M&A Deals in the oil and Natural Gas Industry

Such a drastic drop in demand has not yet appeared. Despite rising prices, consumer purchasing has not greatly declined. The Energy Information Administration estimates that worldwide oil demand growth for the 2004-2006 interval will average about 1.8 million barrels per day, which represents a 2.1 percent average annual increase. The annual increase for 2004 was only slightly higher at 3.2 percent.

With US production output limited and demand high, companies in the industry are spending on infrastructure as they strain to meet the current demand. Such capital expenditures are likely to increase the prices ultimately paid by consumers.

A number of businesses are expecting possible disruptions in the natural gas supply in some states this winter.

Values and Productivity Measures for the Oil & Gas Industry

Utilities give priority to supplying natural gas to homes, which means if there are shortages, industrial consumers will be forced to turn to other sources of energy.

Gas shortages are certainly possible - the US depends on natural gas for 24 percent of its energy requirements, compared with 23 percent for coal and 40 percent for oil. The 1990's saw a large build-up of natural-gas-fired electricity plants. Natural gas exploration has declined since then, causing the supply to fall short of the demand.

Median Price Ratios for Public Mid Cap M&A Deals in the Oil and Natural Gas Industry

Median Price Ratios for Public Large Cap M&A Deals in the Oil and Natural Gas Industry

One result of this shortfall is increased pressure from gas companies to open new areas to drilling and exploration. Such efforts have meet with firm resistance - Republican leaders in the House were forced to pull back on a budget bill that would have opened the Arctic National Wildlife Refuge in Alaska and coastal waters off several other states to drilling - but lobbying for additional gas resources can be expected to continue.

The oil and natural gas industry provides more than fuel. Petroleum products are used for a number of industrial applications and are a major component of the chemicals industry. Increasing oil and gas prices are having a considerable impact on industrial users. The Dow Chemical Company, the largest chemicals manufacturer in the United States, has shut down 23 US plants in the last three years and shifted production to Kuwait, Argentina, Malaysia, and Germany, where natural gas is cheaper. As more industrial users of oil and gas products take efforts to control their consumption, demand from the industrial sector can be expected to decrease.

The oil and gas refining sector is growing. According to data from the American Petroleum Institute, the US oil industry is making additions to refineries that will add 1 million to 1.3 million barrels a day to the nation's supply within four years. The planned increase is driven by the need for additional refinery resources. Steve Parker, energy analyst at the brokerage Kercheville & Co., stated that "refining is the really big bottleneck right now. We can pull more oil out of the ground, but unless we can refine it, it does no good."

New refining capacity is primarily being added to existing plants, instead of developing new facilities. Houston-based Marathon Oil Corp. stated that it would spend $2.2 billion to expand its refinery in Garyville, Louisiana. Sunoco intends to invest about $1.8 billion in its refineries over the next three years. Regulatory and environmental hurdles make new refineries expensive and time- consuming to build. Energy Information Administration studies show a new 200,000- to 300,000-barrel-a-day refinery would take 10 years to build and cost as much as $3 billion. Refiners are also being careful not to bring the supply beyond the current demand.

Overall, the oil and natural gas industry is currently in a strong position, supported by high prices and reasonable demand. While there are a number of indications that the boom will not last forever, the industry can expect to remain an important element of the world economy for some time to come.

Sources: Knight-Ridder Tribune Business News, New York Times, US Department of Labor, Value Line

Purchase Price Ratios - Last 90 Days

Purchase Price Ratios - Last 90 Days

Market Summary

By Andrew Dolbeck

Editor

Copyright NVST, Inc. Nov 21, 2005

Source: Weekly Corporate Growth Report

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