BP-Shell Megadeal Would Create European Rival to Exxon Mobil

Shell and BP Source: Bloomberg/Bloomberg Photo by Bloomberg /Source: Bloomberg

Article content

(Bloomberg) — If Shell Plc were to acquire BP Plc, it would be among the largest deals in European history, creating for the first time a European oil major that could challenge industry leaders Exxon Mobil Corp. and Chevron Corp.

Article content

Article content

The circumstances for such a takeover might not be auspicious for BP — its shares have lost almost a third of their value in the last year and investors are unconvinced by the company’s turnaround plan — but the deal would be transformative for Shell.

Article content

Article content

Since Bloomberg reported that Shell has been studying the merits of an acquisition — something both companies have so far declined to comment on — analysts have been gaming out both the upsides and downsides. Here are some of their conclusions:

Article content

Article content

Oil Behemoth

Article content

Combining the two London-based oil majors would create an energy giant with upstream oil and gas production of nearly 5 million barrels of oil equivalent a day, according to UBS Group. This would be an 85% increase from Shell’s current output of about 2.7 million barrels a day, making the combined company the largest investor-owned oil and gas producer. Exxon produced an average of 4.6 million barrels of oil equivalent a day in the first quarter, while Chevron pumped 3.4 million a day. 

Article content

Adding BPX, the Denver-based US shale unit, to Shell’s portfolio would go some way to correct the company’s decision to sell its business in the Permian basin to ConocoPhillips in 2021, just before the industry experienced a major boom. Shell’s then-upstream director, Wael Sawan, is now chief executive officer. 

Article content

LNG Dominance 

Article content

Shell is already the world’s largest seller of liquefied natural gas, and acquiring BP would propel the business “to new heights,” said RBC. The combined companies’ LNG sales would jump to more than 90 million tonnes a year, representing more than 20% of the global market today.

Article content

Article content

Such a large globe-spanning position would unlock further opportunities for trading and optimization, a key driver of LNG profit given recent volatility in natural gas prices. Bringing two sizable fleets of LNG tankers together could also provide substantial cost savings on shipping.

Article content

Trading Expansion

Article content

BP and Shell are already among the world’s largest traders of commodities, with their many physical assets from refineries to pipelines giving them valuable insights into the market.

Article content

The units are opaque, but the companies have revealed some clues about their value. BP traders delivered an average uplift of about 4% to the company’s return on capital during the last five years. For Shell traders over the last decade, that figure was similar at 2% to 4%.

Article content

It’s unclear if a combination would elevate those returns by enough to justify an acquisition premium. “Would Shell want to pay up for a trading organisation, given it already has its own?” RBC asked. 

Article content

High Price

Article content

Buying BP would probably require Shell to pay a roughly 20% premium to the company’s £57 billion market value, RBC said.