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Oil rout gives Exxon and Shell reason to buy rival ‘sisters’

Screen Shot 2015-01-31 at 08.53.48…a major deal over the next year that will bring together two of the super majors, or see one of their smaller rivals swallowed up, is highly likely – and almost a certainty if historical precedent is anything to go by. Certainly, if the oil rout of the late 90s is anything to go by, a major deal among the industries big “sisters” is just around the corner.

Article By Andrew Critchlow, Commodities editor, The Telegraph, published 30 Jan 2015 under the headline:

Oil rout gives Exxon and Shell reason to buy rival ‘sisters’

First there were the “Seven Sisters”, a term coined in the 1950s to describe a cabal of the world’s biggest international oil companies (IOCs), which at that time controlled the supply of fossil fuels with a vice-like grip.

Then came the Yom Kippur war of 1973 and the subsequent Middle East oil crisis, which would gradually see their power over more than three-quarters of the world’s crude wrestled back by newly independent states in the Persian Gulf.

By the late 1990s – with oil prices at around $20 (£13.20) per barrel – the original seven had grown much bigger and been morphed into new giants, which consumed their smaller rivals in a race to acquire what little of the world’s oil and gas reserves still remained open to them.

By early 1999, a bone-shuddering plummet in the price of crude to $10 per barrel spurred a frenzied wave of mergers and acquisitions across the sector as companies moved quickly to grow bigger in order to survive. Exxon – the descendant of John D Rockefeller’s behemoth Standard Oil of New Jersey – swallowed up Mobil, creating what was until recently the world’s biggest company by market value.

A few months earlier, Sir John Browne pulled off the defining moment of his career when he transformed BP into Britain’s biggest oil major for a time by splashing out $48bn for Amoco – another relic of the giant Standard Oil conglomerate in the US. French super major Total gobbled up Petrofina and Elf, which had been a major sponsor of Nigel Mansell’s race-winning F1 car.

Now, a new oil shock – which has seen crude prices plummet by 60pc since June – has created an environment in which deal makers are once again talking about another spate of consolidation among the giants of the oil and gas industry: Exxon Mobil, Chevron, ConocoPhillips, Royal Dutch Shell, BP, Total and Italy’s ENI.

Could seven become six? Or will these giants of the industry spend capital, that would otherwise be employed in developing new oil fields, on buying up the best of the smaller operators? An oil and gas mega-merger is also a cute way to return value to shareholders at a time when the industry’s reliability for paying healthy dividends is being challenged.

Therefore, a major deal over the next year that will bring together two of the super majors, or see one of their smaller rivals swallowed up, is highly likely – and almost a certainty if historical precedent is anything to go by.

Two companies appear to be most vulnerable to being swallowed up: the giant BP and the smaller BG Group. Four years after the Gulf of Mexico Deepwater Horizon disaster blew a hole in its balance sheet and its Macondo oil well, the British supermajor is ripe to be the first victim in this next round of consolidation. Its enterprise value has slumped to £92bn since reaching a high of £130bn in 2007, while the level of debt on its books has more than doubled to £33bn over the same period, according to Bloomberg data.

Under the leadership of chief executive Bob Dudley, BP has spent most of the past four years conducting a garage sale of its assets to raise more than $38bn to cover the staggering cost of compensation, fines and clean-up from the Deepwater episode. The latest sale came this week when it offloaded part of a stake in two promising offshore fields in the Gulf of Mexico to Chevron. However, we are approaching the end of its £14bn legal battle with the US government under the Clean Water Act, and the limits of what Mr Dudley may be prepared to offload from the company’s portfolio.

So now may be the time to gobble up what remains in one bite. Out of the big six super majors, only Exxon Mobil would appear to have deep enough pockets and the necessary clout in Washington to pull off this particularly ambitious deal.

A merger of the two would create a global corporate titan of almost unimaginable scale, with a combined enterprise value in excess of £400bn, leapfrogging Apple as the world’s largest company by a £70bn margin.

Its gargantuan size would come despite the slump in oil prices, but it is that drop which has arguably made the deal even more conceivable. Although neither company will comment on speculation surrounding a potential merger, the logic for them coming together has been made more compelling by Brent crude trading under $50 per barrel.

The other potential deal that increasingly makes sense, given the market-wide slump in energy prices, would see BG Group swallowed up by Royal Dutch Shell. The Anglo-Dutch giant is the most gas-focused of all the six supermajors. BG has a significant liquefied natural gas portfolio. It would thus would fit into Shell’s strategy to build a significant market lead in the delivery of a fuel that is powering growth in Asia’s rapidly developing economies.

Asked about the opportunities for acquisitions during Shell’s earnings this week, chief executive Ben van Beurden certainly didn’t rule out the prospect, despite slashing $15bn off its capital expenditure plans over the next three years. Mr van Beurden said that Britain’s largest oil company would take an “opportunistic” view when it comes to weaker capitalised upstream explorers.

BG Group could certainly fall into that category. It has endured a tough year following the departure of Chris Finlayson and pressure to bring major projects, such as its Queensland gas venture, on stream on schedule.

According to advisory firm AT Kearney, a lot will happen in the year ahead. “For some, the shake-out will be painful, but for those in the driver’s seat, it is a rare opportunity to reshape the competitive landscape to their advantage,” it said. “The sands are shifting, and all companies will need to be clear on their strategies to thrive – or even survival – in 2015.”

Certainly, if the oil rout of the late 90s is anything to go by, a major deal among the industries big “sisters” is just around the corner.

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