* Oil price slump could herald return of mega-mergers
* U.S. shale players likely to consolidate intrabasin
* Distressed independents vulnerable to approaches
By Claire Milhench
LONDON, Dec 10 (Reuters) - Plunging oil prices look set totrigger another wave of industry consolidation after a decadewhen mega-deals were scarce, but investors want to see mergersthat can squeeze out cost savings and only after a lavishdividend is paid.
Over the last 18 months Big Oil has faced shareholderpressure to prioritise value over volume - to improve theirreturn on capital rather than focus on production growthtargets. As a result, oil majors have been in disposal mode.
But with oil 40 percent cheaper since June, companies arelikely to change tack and consolidate, with everything frommega-mergers to opportunistic buys of distressed shale oilproducers on the cards.
"Anyone who doesn't think consolidation is going to happenmust be mad," said Charles Whall, a manager of the InvestecGlobal Energy Fund. "The exploration performance of thesecompanies has been woeful. They have to replace reserves, andthey're not doing that organically so they need to do itinorganically. But all we have seen are disposals."
There are signs that the industry mood music has changed inrecent weeks, with a proposed $35 billion tie-up between oilservices companies Halliburton and Baker Hughes.
"There is some talk you could see that take place within theoil majors community, and a return to mega-mergers as we saw inprevious downcycles like 1997/98, 2002/3," said Will Riley, amanager of the $314 million Guinness Energy Fund.
He believes a merger of majors could make more financialsense than an acquisition because both parties would benefitfrom synergies and cost savings without having to stretch andstress their balance sheets.
"A number of the European and U.S. super-majors could fittogether because they're all international producers withdiversified portfolios that could work together," he said.
Exxon's 1998 merger with Mobil is widely held to be one ofthe most successful tie-ups in any industry. Within five years,it had the same number of employees as before the deal, but thebusiness was 50-60 percent larger.
Some investors believe Spain's Repsol, which is showingrenewed interest in Talisman Energy, has thebalance sheet to make a similar game-changing deal, withBarclays analysts tipping it as a key investment for 2015.
However, Christopher Wheaton, manager of the Allianz Energyfund, said mergers couldn't just be about cost-cutting, therehad to be a strategic rationale too: "It's about enabling aproject to happen - bringing net asset value forwards. M&A hasto be built on value creation."
But he believes transformational M&A would be reallydifficult to pull off: "It's a rule of thumb that the vastmajority of M&A destroys value."
Crucially, investors want to make sure oil companies don'tsacrifice the dividend - one of the main reasons to holdintegrated oil and gas majors in portfolios. "Dividends comefirst and M&A and everything else comes second," Wheaton warned.
DISTRESSED SHALE
The oil price slump is also expected to put pressure onindependent producers, particularly those in the U.S. shaleindustry, opening the door to consolidation amongst shaleplayers, or opportunisitic bolt-ons for majors.
"The U.S. shale industry boom has been built on debt," saidWheaton. Although these producers hedge their output about 12months forwards, they are also heavily dependent on issuing debtin the high yield bond market or raising new equity fromshareholders.
But some energy-related issues are already trading indistressed territory, a sign of financial strain, and defaultsare expected to rise.
"We can see companies that reasonably quickly could get intodistressed positions," said Whall, speaking about independentoil producers in general. "We do see companies that will have toconsider approaches and that are very vulnerable to approaches."
Wheaton pointed out that oil majors like Shell have saidthey would not chase these assets but if they came up indistressed sales they might be interested in looking at them.
"Shell's gearing at the end of Q3 was about 15 percent -that is a balance sheet that could withstand several years oflow oil prices and do some acquisitions."
Both Riley and Wheaton expect to see consolidation withinshale basins as the strong take out the weak. "Where companieshave strong market share within a basin, whether it's thePermian or the Bakken, they're going to get stronger becausethey'll be able to consolidate competitors," Wheaton said.
Riley pointed to the recent "merger of equals" betweenWhiting Petroleum and Kodiak Oil & Gas, both independentproducers operating in the Bakken, North Dakota. "These were two basin players consolidating their acreage,creating cost synergies by doing so," he said. (Editing by William Hardy)
