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Tie-Up Between BP and Royal Dutch Shell In 2015?

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Published: Dec 29, 2014 at 2:17 pm EST

Ashley Armstrong, the Telegraph’s merger and acquisition columnist, hinted at the possibilityof a merger between London-based BP plc (NYSE:BP) and Netherlands-based Royal Dutch Shell plc (ADR) (NYSE:RDS.A) in a piece over the weekend.

M&A activity during 2014 reached the $3.5 trillion mark, the highest since the 2008 financial downturn. Ms. Armstrong expects more huge deals next year.

She thinks that the decline in commodity prices will act as a catalyst for M&A between mining and natural resources companies. Since this year’s peak in late June, crude oil prices have fallen 45% and are on track to record the biggest decline since the financial crisis. The slump in crude oil prices to $60 per barrel will negatively impact the profitability of some energy companies at the very least, and bring into question the business models of some businesses at worst.

The decline in crude oil prices will cause companies to scale back on their exploration and production (E&P) budgets or reduce their dividends – or both.

Ms. Armstrong cited “senior sources” who believe there is merit to a possible massive deal between European oil giants like BP and Shell, and that the situation could be reminiscent to the merger boom near the end of the 20th century. In November 1998, Exxon Corp. revealed that it would acquire Mobil Corp. for $80 billion, after which the joint entity came to be known as Exxon Mobil Corporation (NYSE:XOM). In October 2000, Chevron Corporation (NYSE:CVX) announced that it had acquired Texaco Inc. for $36 billion.

According to one UK-based banker, “These blockbuster, transformative deals either come at the dizzying heights of confidence or in the doldrums and with the oil slide we are getting to the latter.”

Oppenheimer Holdings Inc. analysts, Fadel Gheit and Luis Amadeo, highlighted that a potential merger could result in cost savings of nearly $10 billion.

The high costs associated with E&P companies in the form of capital expenditure (capex) budgets and strong shareholder returns makes it mandatory for these companies to generate healthy returns. This can cause an all-share merger between two underperforming companies, as a share-for-share merger would not be suitable in such a scenario. Furthermore, for a possible deal to take place in the energy sector, management of both companies have to be certain crude oil prices have stabilized even if they haven’t yet bottomed out.

But Bidness Etc believes a Shell-BP merger remains highly unlikely due to the numerous challenges, including regulatory permission. The sanctions on Russia mean BP’s exposure in Rosneft (OTCMKTS:RNFTF) contributes to making it an unattractive acquisition target.

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