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BP left stranded by US vilification as rejuvenated Shell storms ahead

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Screen Shot 2015-04-09 at 22.49.19Article by Jeremy Warner published 12 April 2015 by The Sunday Telegraph 

BP left stranded by US vilification as rejuvenated Shell storms ahead

They say that fortune favours the brave. Ben van Beurden (right), chief executive of Royal Dutch Shell, will be hoping they are right, for by firing the starting gun on a new wave of oil industry consolidation with an audacious £47bn swoop on BG Group, he’s taking quite a gamble on a recovering oil price.

By acting now, Mr van Beurden may have gained some sort of first mover advantage.

If he succeeds, he will also have catapulted his company into pole position as the world’s largest oil major. But he is also paying a very fancy price – so high, in fact that despite the enthusiastic backing of the BG board and the lack of any obvious regulatory obstacles, there is some manifest scepticism in markets about whether the takeover will ever come to fruition.

The BG share price is trading at a much wider discount to the see through price of the offer than you would expect for such an apparently slam dunk deal.

There may, of course, be some perfectly benign explanations for this gap. For starters, this is an exceptionally big deal, and it therefore takes big money to arbitrage away the discount. Regulatory approval seems not to be in much doubt, but it is also likely to take a long time to achieve – the best part of a year for the necessary Brazilian consents alone.

What’s more, those who traditionally arbitrage these discounts have got badly burnt on a number of deals recently that similarly promised absolute certainty but eventually collapsed.

Yet if you were super cynical you might also think that all Shell has done by bidding at such a multiple is take out an option on a higher oil price.

Mr van Beurden is on record as saying that the financials only really begin to sing for Shell once the oil price recovers to $90 a barrel. If there is no sign of progress by the end of the year, or more worryingly still, the price has taken another turn for the worse, he could theoretically pull out, though with a £750m break-fee riding on it, it will certainly cost him.

None the less, it seems that Mr van Beurden has quite craftily hedged his bets. He’s bid high enough to deter rivals, but he’s also given himself an out if the valuation still looks too high in a year’s time.

All the same, we must assume that for the moment he’s serious. For Shell, BG fills an obvious need, with BG’s less mature exploration and development plays filling a growing shortfall in Shell reserves.

In any case, if the oil price again comes under pressure, it won’t be just the BG takeover which is in jeopardy, but the Shell dividend too. Even as things stand, Shell accounts for some humungus proportion of all dividend income paid in the UK. Takeover of BG will further concentrate dividend income in just one company – not an entirely healthy situation.

Where does all this leave Shell’s UK rival among the oil majors, BP?

Even further diminished might seem to be the answer. BP too toyed with the idea of buying BG a number of years ago, but was deterred by the price. Today it is no position to buy anything, beyond perhaps mopping up some small fry. That’s largely down to the continued disaster of Deepwater Horizon, the Gulf of Mexico oil spill. By the time everyone has had their fill, BP is unlikely to get much change out of $40bn from this apparently open ended liability.

Anyone would think that the Obama administration, in cahoots with the rapacious American legal system, was deliberately attempting to bleed the company dry, so as to make it an easier bite for the US’s very own ExxonMobil. Presumably, the UK government wouldn’t allow it, but you can already hear Exxon sharpening up its investment bankers for the off chance.

The hypocrisy of what America is doing to BP is quite breath taking. The Union Carbide settlement for the Bhopal disaster in India, which killed thousands of people and poisoned hundreds of thousands of others, was a pitiful $470m. One set of compensation rules for Americans, it seems, another for everyone else.

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