Consolidation of Mid-Size Oil Firms is Sign of Current Market Conditions

Source Article: Suncor's Petro-Canada bid may spur more deals | www.reuters.com (article)

Implications:
1) Suncor(TSX:SU)/Petro-Canada(TSX:PCA) combination makes for stronger single entity

2) Merger will make access to capital easier- Oil sands are expensive development prospect through to production.

3) Creates a firm with broad interests and verticle integration

4) Other mergers are going to occur in "Mid-Major" firms, and not be limited by national borders

5) State Oil firms may look to reach out to create "hybrid" firms across borders like PDVSA-Citgo

Analysis:
Suncor's(TSX:SU) purchase/merger with Petro-Canada(TSX:PCA) makes sense for both the players, and advances Canada's overall energy interests by creating a player with deep pockets and a breadth of resources.

Firms of this size, while large by conventional standards, are dwarfed the Super Major Multinationals like Chevron(NYSE:CVX), ExxonMobil(NYSE:XOM), BP, Royal Dutch Petroleum (Shell(NYSE:RDS/A)(NYSE:RDS/A)) and Total. They compete with these firms for exploration and development properties, in distribution and retail in R & M operations, and for capital on the global lending market.

Bigger, in this business, means real and realized efficiencies of scale, and make economic sense. The combined entity will find access to capital an easier proposition, and be able to expand those savings over the entire range of both firms operations as they combine.

Look for other mergers to occur in Major or Mid-Major Oil firms. The time is right for strong firms to make moves before energy prices head precipitously back up, making the book values of known reserves prohibitively expensive.

The prospect of State-owned oil firms purchasing privately held firms in other markets shouldn't be discounted as a potential play, either.

Had Venezuela's current political posture not come to complicate the situation, the PDVSA-Citgo combination could be a blueprint as how to leverage a nation's natural resources into commercial interests that are far more than trading extracted natural resources for cash.