By Javier Blas | –
In the words of Royal Dutch Shell Plc’s boss Ben van Beurden, the fundamental logic behind his decision to buy BG Group Plc “always existed.”
What pushed the US$70 billion deal over the finish line was that it had become “very compelling from a value perspective” after oil prices fell by half to US$50 a barrel.
Ben van Beurden is unlikely to be alone among the chief executive officers of the world’s largest oil companies in thinking that valuations are looking very persuasive.
Just as the first deal between BP Plc and Amoco Corporation during a previous oil price slump in 1998 triggered a wave of deals, the Shell-BG merger is likely to push big oil to consolidate again.
“The deal will put pressure on oil majors to act,” said Aneek Haq, head of oil research at Exane BNP Paribas in London. “Shell has been opportunistic, Exxon may well feel the need to follow.”
Until now, the prevailing view among industry executives, bankers and analysts was that buyers and sellers were too far apart on valuations. Equity prices have yet to catch up with oil’s decline.
The MSCI World Energy Index is down almost 25 per cent since its most recent peak in June 2014.
Observers said a longer period of low prices — perhaps testing the US$35 a barrel, the level last seen during the financial crisis in 2008 and 2009 — was needed before big deals started.
The Shell-BG acquisition indicates that companies are ready to move. The message from the deal is clear: In a world of lower oil prices and cost cutting, size and growth potential matters. That strategic view presages a repetition of the wave of deals a decade-and-a-half ago that rocked the energy industry and created today’s so-called oil supermajors.
BP kicked the round of mega-mergers in 1998 when it announced plans to take over Amoco at a time when crude hovered below US$12 a barrel. Soon after, it took Atlantic Richfield Co.
Exxon followed suit with the mega-buyout of Mobil Corp. Other combinations of the era included Chevron’s merger with Texaco Inc. and Total SA’s purchases of PetroFina and Elf Aquitaine.
“This could signal the start of a wave of M&A activity,” Jean-Luc Romain, an analyst at CM-CIC Securities in Paris, said by telephone. “Exxon has made no secret that it’s on the hunt for acquisitions.”
Few, however, see mega-mergers with the scope of those of 15 years ago, in large part because the industry is already controlled by a few big companies. Instead, supermajors, which have struggled to build their oil and gas reserves, could use the drop in valuations to buy medium-size groups and secure reserves that could be used to grow when prices recover. For some executives, the mantra is that’s it cheaper to buy than build.
The share price of perennial takeover targets in Europe such as Tullow Oil Plc and Ophir Energy Plc rose on Wednesday as investors anticipated potential takeovers.
In the U.S., companies including Anadarko Petroleum Corp., Hess Corp., Whiting Petroleum Corp., Marathon Oil Corp. and EOG Resources Inc. are seen as potential targets.
Among the predators, Total appears as the most likely candidate in Europe to follow up with the consolidation that Shell has started.
The French group has showed with its recent deal with Abu Dhabi to renew an oil concession for 40 years that it is willing to pay for oil reserves and growth.
BP, still fighting a multi-billion dollar legal bill from the U.S. Gulf of Mexico spill, is unlikely to join the wave of deals in Europe.
On the other side of the Atlantic, only Exxon, the world’s biggest energy company by market value, has pockets deep enough to play a leading role.
“Shell’s purchase of BG Group heralds a scrabble by big oil,” said Pascal Menges, manager of the Lombard Odier Global Energy Fund.
Outside Exxon, buyers will have to “content themselves with the pick’n and mix counter,” he said.
Indeed, it’s possible that the Shell-BG deal may be a false dawn for industry consolidation because it’s difficult to replicate.
“Oil companies will feel under pressure to follow — but they should not,” Michael Hulme, manager of the commodities fund at Carmignac, said. “The mega mergers of the 1990s delivered very little value, with the exception of Exxon- Mobil.”
Investors said that big deals in Europe were unlikely as any combination of national champions such as Total, Eni SpA of Italy and Repsol SA of Spain would face significant political opposition. Trade unions would also revolt facing job losses from the combination.
There’s one other reason today’s deal my prove unique. Shell also largely missed the wave of consolidation that engulfed the energy industry 15 years ago, in part due to a complicated shareholding structure back then, the heritage of a never completed merger between its Dutch and British arms.
“This time round Shell has no such issue, being a normal U.K. Plc,” said Christian Stadler, associate professor of strategic management at Warwick Business School.
Javier Blas is of Bloomberg News.