Thousands of small and medium-sized producers are being or will be affected by merger activity. An understanding of the econornic justification for mergers suggests that the level of activity will increase significantly in the coming year. In fact, it appears that the industry has no other alternative but to consolidate and merge.
Industry Background
An oil and gas producer approaches his business in a simple and direct way. The key to a producer's success is based on several key variables:
- 1 laving good technical people who can find oil aiid gas reserves 2. Ilcveloping and producing those reserves without severe operating problems 3. f'roducing those reserves so that the company hils a positive cash flow 4. β¬laving access to cash flow and incremental capital for the company to grow through reserve growth.
FIistorically, a producer would use his own cash flow for exploration and borrow for development. Once the reserves were producing, the cash flow of the company would increase to repay the capital borrowed and also to increase exploration spending. ' f i e biggest risk to the producer was his ability to find and replace the reserves being produced. Finding reserves was the key to financial success and growth. The pIocess is a dynamic one because exploration SIICC~;':.~ resiilts in reserve and cash flow growth. But once new reserves are brought onstream, the company must immediately be lookmg for new and larger reserves to replenish the reserve base.
' 1 1 ~ rapid increase in oil and gas prices in the 1979-1 981 period caused significant changes among producers: Iack 1,. Copeland is chairman of the board of Copeland, Wickersham, Wiky 6 Co. in New York.