Evening Standard (London): SHELL OUT ON SHELL? FOR BP, IT MAY MAKE SENSE

December 14, 2006] 

Evening Standard, London, Neil Collins column

One of the rules of engineering states that things don’t fail catastrophically without warning. There’s almost always an indication of trouble ahead some time before the event. As the gruesome facts of the disaster that overtook BP’s Texas City refinery leak out like a toxic spill, it’s clear that plenty of warning signs had been ignored before the plant blew up, killing 15 people.

The harbinger of trouble can take many different forms, but here’s a strange one: a long analysis of the benefits of merging BP with Royal Dutch Shell, put together by David Cline of ABN Amro. Over 116 pages, he grinds through aspects of such an unlikely event — from synergies to regulation and divestment — concluding that none of the multitude of problems is insurmountable, and that Shell (rather than BP) is an absurdly cheap stock.

Now, don’t be cynical. Creating a $600 billion behemoth would allow scores of analysts and corporate financiers to open those new accounts created by Coutts & Co for the ultra-rich (minimum assets to qualify, 30 million). The fallout from a merger would enrich hundreds more dealmakers, from making the disposals the world’s regulators would require for allowing the creation of British Shell Petroleum. To get the market interested, ABN’s team sees savings of $10 billion a year from the combination, “value creation” of $186 billion, and Shell shares worth 30 each, or getting on for twice today’s price.

So, is this an analyst dreaming of riches, or an indicator of something dramatic ahead? The notion would have seemed absurdly unlikely a couple of years ago, but it’s less so today. Neither company is riding high. Shell lost its chairman after the fiasco of its overbooked oil reserves, while BP has produced an uneasy compromise following its boardroom split.

Of the two, it’s Shell that seems to have emerged with less damage. As the chart here shows, BP shares are a major reason why the FTSE 100 index is still below where it stood at the start of the millennium. Shell’s new broom, Jeroen van der Veer, grasped that its old introverted culture had to go, along with its old share structure, and is winning fans in the City. At BP, extending Lord Browne’s tenure, but for only a few months, looks weak.

Browne’s next hurdle is the final results in February. It promises to be quite a challenge. Along with the sackcloth and ashes (or worse, the threat of criminal proceedings against the company) over the refinery deaths and the Alaska pipeline leaks, the setbacks in the Gulf of Mexico after the capsize of the Thunder Horse production platform, and the creeping confiscation of assets in Russia, there is the little matter of the dividend.

It’s declared in dollars, and the last time the greenback was weak, sterling holders suffered an irritating cut in the payout. Browne is unlikely to repeat that mistake; after all, some might see it as a harbinger of yet more trouble ahead.

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