Some of Shell’s big shareholders are said to be frustrated by the company’s continued spending on expensive far-flung projects that fail to yield healthy returns. Alongside its profit warning at the start of this year, Shell announced that it was halting a controversial exploration programme off the coast of Alaska because the costs had far outweighed the results. Some $4.5bn had been ploughed into exploring in the region since 2005. Rumours continue to swirl that an activist investor is circling Shell with a view to taking a stake and forcing it adopt a more radical strategy.
Article by Ben Marlow published by The Telegraph 26 July 2014
Ten years ago, Lord Browne, the then chief executive of BP, flew to Williamsburg, Virginia, for a board meeting, where he planned to outline detailed proposals for a mega-merger with Royal Dutch Shell.
The radical tie-up had been discussed in secret weeks earlier with Jeroen van Der Veer, his counterpart at Shell, during a stroll around Lake Como in Italy.
With an estimated $9bn (£5.3bn) of synergies from the deal and Browne’s conviction that he had the backing of his own executive team, including his eventual successor Tony Hayward, the BP chief was ready to deliver the grand plan. But on the flight out of the UK, he suddenly got cold feet.
“I knew the answer even before the meeting started. The sentiment was ‘why rock the boat?’ The Shell merger was not discussed. It was not going to be done and that was that… In the end we did not rock the boat; we missed it,” he recounted in his memoirs four years ago.
Browne, who stepped down in 2007, was among a generation of buccaneering oil major executives who had overseen a wave of mega-mergers at the end of the nineties that totally reshaped the industry.
BP moved first, merging with Amoco and kicking off a flurry of tie-ups including Exxon and Mobil, Texaco and Chevron, and TotalFina and Elf, that created the so-called supermajors.
More than a decade and a half on from those unions, could we be on the cusp of another round of mega-mergers? Not immediately, but some senior City sources think falling fortunes could force the giants into each other’s arms in the next year or two.
Their central argument for a fresh flurry of deal-making is a problem affecting the whole industry: a slump in profits. In January, Shell issued a shock quarterly profit warning and weeks later posted a 23pc fall in annual earnings from $25.3bn the year before to £19.5bn in 2013. In April, BP followed suit, reporting a similar drop in profits for 2013 and the first quarter of 2014.
Their US rivals are similarly struggling. In May, Exxon Mobil, the titan of the world’s oil majors, reported falling profits for the fourth quarter in a row. ConocoPhilips also posted a dip.
The industry is being hit by a perfect storm of headwinds: lower oil and gas prices which mean falling margins in their downstream businesses, which make petrol, diesel, and other finished products; as well as higher exploration expenses and dwindling reserves.
Oil executives say their profits are pinched because, as many fields around the world age and produce less oil, they are forced to drill in deeper oceans and more remote places such as the Arctic to keep up with production. The days of easy discoveries seem to be over and widening the search costs more money.
There is certainly plenty of rationale for a further round of mega deals such as that led by Browne in the late Nineties. And there may be appetite from investors too. Some of Shell’s big shareholders are said to be frustrated by the company’s continued spending on expensive far-flung projects that fail to yield healthy returns.
Alongside its profit warning at the start of this year, Shell announced that it was halting a controversial exploration programme off the coast of Alaska because the costs had far outweighed the results. Some $4.5bn had been ploughed into exploring in the region since 2005. Rumours continue to swirl that an activist investor is circling Shell with a view to taking a stake and forcing it adopt a more radical strategy.
One senior banker joked that if you got the six oil majors into a room at the same time you could quickly get each one to find $50bn of costs to take out of their respective businesses.
Nor should size be an impediment. Dealmakers claim that if ExxonMobil merged with one of its biggest rivals the enlarged company would still only account for around 6pc of global oil production, hardly the sort of level to trigger serious competition concerns. The Texas-based behemoth currently has a stockmarket value of £440bn. Doubling its size is far from unthinkable, they say.
That said, there are several barriers to further activity.
In 12 years at the helm of BP, Browne oversaw a £48bn bid for Amoco and the creation of its Russian joint venture TNK-BP, which opened up the gates to Russia’s vast reserves. He also seriously flirted with approaches for Yukos and Shell, his memoirs revealed.
However, his tenure came during a golden era of expansion. Today, there is an industry trend to shrink by selling off assets that are no longer commercially viable.
Political opposition may also be a problem. According to high level City sources, the primary reason that Exxon never went ahead with a rumoured bid for BP in the months after the Deepwater Horizon disaster was opposition from Washington to Exxon getting any bigger and exerting more influence over the oil industry.
But perhaps the biggest hurdle of all is that the current crop of executives lack the daring to spearhead a game-changing acquisition, despite a general shift across boardrooms and in investor sentiment towards taking greater risks.
The stars may be slowly moving into place but it could take a number of years before they are aligned. In his book, Browne said that the search for a partner began in 1995. Eventually he found one — in 1998.