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Reuters: ‘Shareholders seeking share price exposure to the possibility of a mega-major should buy Royal Dutch Shell’

Reuters headline: UPDATE 1-Oil stocks rise – M&A or sector back in favour?

Fri May 18, 2007 10:48 AM BST
(Updates shares, adds analysts, background in grafs 8-15)
By Tom Bergin

LONDON, May 18 (Reuters) – European oil stocks continued to rise on Friday, reinforcing market talk about potential mergers, but analysts were sceptical, suggesting the rise may be due to a growing feeling that oil prices will remain high for longer.

The DJ Stoxx European oil and gas sector index < .SXEP> traded up 1.2 percent at 0908 GMT, despite a fall in oil prices.

The three biggest oil companies, Royal Dutch Shell Plc , BP Plc and France’s Total SA were all up around 2 percent.

This follows a 2 percent rise in the DJ Stoxx index on Thursday — Shell rising over 4 percent at one point, with traders citing rumours of a possible tie-up with BP. Both companies have declined to comment.

“What we actually think is going on here is a spot of sector rotation. Simply put: for the first time in 12 months, there is an implicit upgrade to oil sector earnings with consensus oil prices likely to have to move up from around $60,” analysts at Citigroup said in a research note.

The investment bank added that investors’ views on refining margins were also growing more buoyant, supporting the re-rating of the oil sector.

Earlier this year, many analysts predicted a drop in refinery margins towards the end of this year. However, the delay of many refining projects has led many industry players to believe a two-years resurgence in margins will be prolonged at least until the end of the decade.

Oil stocks suffered in the first quarter, after analysts started to cut their forecasts for oil prices late last year. However, a recovery in oil prices since January and expectations that the oil market will remain tight for the foreseeable future have supported valuations since then.

M&A TALK QUESTIONED

Many investors and analysts were sceptical of the latest of talks of mega-mergers involving the world’s biggest oil companies.

“In terms of the big two UK ones (Shell and BP), I think at this moment in time, especially with all the various things that are going on with BP it might be a little bit too much for either of them to have a good chew on,” said Richard Hunter, head of UK equities at Hargreaves Lansdown.

Neil McMahon at Bernstein said he couldn’t see any gains from mergers between the Supermajors, as the top tier of the oil sector, Exxon Mobil Corp. , Shell, BP, Total and U.S. number 2, Chevron Corp , are known.

“The problem with mega-mergers are that; the Majors are now too big; there would be little strategic benefits; politically it would be unacceptable with high commodity prices; and lastly the technical structure of asset agreements would prohibit an easy marriage,” McMahon said.

However, some do see benefits in further sector consolidation.

Analysts at ABN issued a report last month saying supermajor mergers could generate billions of dollars in annual savings for the merging parties. The bank added that Shell was best placed to gain from sector consolidation.

“Shareholders seeking share price exposure to the possibility of a mega-major should buy Royal Dutch Shell,” ABN said. (Additional reporting by Rebekah Curtis)

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