--Clyde Russell is a Reuters columnist. The views expressedare his own.--
By Clyde Russell
KUALA LUMPUR, May 19 (Reuters) - There is a widespreadassumption that weak commodity prices are likely to spark a waveof merger and acquisition activity as stronger companies seek tobuy assets on the cheap.
The $70 billion buyout of BG Plc by larger rivalRoyal Dutch Shell is generally viewed by investors andanalysts as the first big deal in a likely series of majormergers and acquisitions in the resource sector.
After all, the last time commodity prices fell sharply,around 15 years ago, there was a rash of mega-mergers, such asExxon with Mobil and Conoco with Phillips in the energy space,and BHP with Billiton and Rio Tinto's purchase ofAlcan.
Notwithstanding the Shell-BG deal, it appears executives maybe more cautious this time around, eschewing mega-mergers infavour of smaller acquisitions and in-house projects to addshareholder value.
Ryan Lance, the chief executive of ConocoPhillips,was adamant that he didn't expect a "big M&A wave any timesoon".
Speaking at the Asia Oil & Gas Conference in Kuala Lumpur onMonday, Lance said the rationale that drove the previous roundof major deals doesn't quite apply any more.
Why would a giant international energy or resource companywant to go down the M&A route currently?
The normal motivators for such mega-deals are the costsynergies that executives believe can be extracted, the abilityto acquire reserves at attractive prices and the addition ofassets that fill gaps in existing portfolios.
The Shell-BG deal was most probably motivated by the desireto build on assets in liquefied natural gas (LNG), particularlyin Australia where BG already has an operating coal seam to LNGplant on the east coast, and Shell effectively has stranded gasreserves after it deferred a decision to build its own plant.
It's likely that there will be more of these kinds of deals,but on a smaller scale, as companies attempt to add assets thatare complementary to their existing businesses.
COST REDUCTION, INTERNAL PROJECTS
But Lance was also clear that while ConocoPhillips looked atdeals from time to time, it hadn't seen anything that was asattractive as developing the internal pipeline of projects.
In the energy space, he said that the advent of U.S. shaleoil and gas production, and the massive addition of reservesthey provided, had made acquisitions for the sake of adding toreserves less likely.
Both large and mid-size companies also had less need to fillin their portfolios with large deals, he said, while the need tomerge to drive cost reductions had been less urgent with thework being done to strip out costs within companies.
The cost reduction mantra was one highlighted repeatedly atthe conference in the Malaysian capital, but the focus of mostspeakers was on how to drive efficiencies within existingbusinesses, and how to deliver greenfield projects without thecost blowouts that typify the resource industry.
What this is likely to mean is a move toward "modularity" inresource projects, meaning the repeated construction ofidentical units to identical standards in order to cut down onboth building and operating costs.
There is no shortage of resource projects being plannedaround the world, from deepwater oil in Brazil and Africa, toLNG in western Canada.
What has changed is that these projects will now have to befar more rigorously costed than they were before, and companiesare more likely to concentrate their efforts in these areas asopposed to seeking to use mega-deals to try and driveshareholder returns in a low commodity price environment.
Perhaps instead of large M&A deals, this time the commoditycycle will deliver more spinoff-type deals, such as BHPBilliton's de-merger of its aluminium and energy coalassets into South 32, which started trading on Monday.
South 32 actually reverses much of the BHP merger withBilliton, and Rio Tinto is looking to do something similar,albeit on a smaller scale, with the planned sale of its PacificAluminium assets.
Currently, with the industry's focus on cutting costs inorder to preserve dividends and thus shareholder value, thevaluations of companies that may present as M&A targets arelikely still too high.
It will take sustained, lower commodity prices to knockvaluations to the level where mega-mergers may make sense again.
It seems that smaller deals and asset disposals are morelikely than a deal on the scale of Glencore's proposed, andrejected, merger with Rio Tinto.
Glencore (GLEN)
