Big Oil sold big assets in 2012

Major oil companies sold off more assets than they bought in 2012, reducing their inventories by a net $56 billion, a report said Thursday.

The trend is a reversal of 2011, when the major companies bought $60 billion more in assets than they sold, according to the report from Wood Mackenzie. High oil prices have driven up the price of producing assets.

“Oil companies make money when they go explore, drill and prove up,” said Ed Hirs, a lecturer in energy economics at the University of Houston. “Once you have production in place, the market will pay you more for the production than for the idea.”

Major oil companies typically pare and trim their inventories. They are able to use their extensive resources to shoulder exploration risks that could transform relatively cheap properties into much more valuable production assets.

In 2012, however, this trend was accompanied by BP and ConocoPhillips’ asset disposition programs. Looming fines from the Deepwater Horizon accident led BP to announce in 2010 that it would dispose of $38 billion of assets by the end of 2013. By December 2012, it had already reached the $37 billion mark, with a rush of deals that included the sale of its Texas City Refinery and various assets throughout the Gulf of Mexico. It also sold its share of its Russian joint venture TNK-BP to Rosneft for $58 billion.

Conoco’s asset disposition is part of a broader decision to spin off its refining business, which changed the kinds of assets that make sense to own.

Read more: Energy M&A activity set a record in 2012

“Because it does not have a downstream component, Conoco does not need to own the production, it is going more to an exploration mode than production and refining,” Hirs said. “They can sell the producing assets, give some of the proceeds to shareholders and plough the rest into exploration.”

ConocoPhillips, which announced the sale of its Cedar Creek Anticline assets earlier this week, has sold $12 billion of assets since the beginning of 2012. Conoco has said that it strengthening its balance sheet and targeting higher-producing unconventional fields throughout North America.

ExxonMobil and Shell are the only major companies that bucked the trend, as they chased exploration opportunities in the North American shale. For example, Shell bought shale property from Chesapeake Energy in Texas’ Permian Basin for $1.9 billion last September, one of the Dutch company’s largest deals in the last two years.

ExxonMobil bought Alberta-based Celtic Exploration for about $3.1 billion in October 2012, seeking to claim its share of natural gas and oil discoveries in Western Canada.

The rush of sales puts the major oil company in a strong position to get their checkbooks out in 2013 for hot deals, the report said.

“The Majors have very strong balance sheets and cash flow so we can expect an uptick in activity,” said Luke Parker, manager of Wood Mackenzie’s M&A Service in a written statement.