Oil minnows are now on the takeover menu

It's not just the oil price that's tanking, shares in small oil and gas exploration companies have nosedived, too – and there is worse to come. The majors see this as a chance to snap up their struggling smaller rivals, as Jody Clarke explains.

It's not just the oil price that's tanking. Shares in small oil and gas exploration companies have nosedived, too, as speculative buyers exit the market. Falkland Oil & Gas is down 40% this year, Petroneft nearly 70% and Roc Oil, the Australian-based oil and gas player, around 80%. But the 'majors', though heavily down, are coping well by comparison. Exxon has fallen by a more modest 25% since January, virtually tracking the lower oil price. So what's the key difference between the majors and the minnows? In a word cash.

Exxon has the security of a $30bn cash pile built up while the oil price surged. In these times of tight credit, this can be used both to buy back stock and to fund vital exploration and drilling programmes. What's more, falling oil prices don't hurt the majors as badly as some fear. Even when oil prices were surging above $140 a barrel, analysts priced many 'big oil' shares using a relatively conservative $80-$90 a barrel in their revenue forecasts. Why? As MoneyWeek share tipster Paul Hill explains, a number of larger firms have production-sharing deals with the local government in some of the 'frontier' regions in which they operate. The various concessions they win often tax-related allow them to recover their production costs quickly. But this comes at a price if the oil price rises substantially, the host country takes the lion's share of any extra revenue.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up
Jody Clarke

Jody studied at the University of Limerick and was a senior writer for MoneyWeek. Jody is experienced in interviewing, for example digging into the lives of an ex-M15 agent and quirky business owners who have made millions. Jody’s other areas of expertise include advice on funds, stocks and house prices.