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The Exxon Mobil-BP Merger Rumor That Just Won’t Go Away

Screen Shot 2015-04-15 at 15.59.22SeekingAlpha.com article by Dave Dierking published 15 April 2015

The Exxon Mobil-BP Merger Rumor That Just Won’t Go Away

Summary

  • The rumors of the viability of an Exxon Mobil-BP merger surfaced once again recently following the Royal Dutch Shell-BG merger.
  • Exxon Mobil could be compelled to make such a transaction due to BP’s relatively inexpensive valuation and the tens of millions of dollars in cost savings a merger would create.
  • The potential scope and size of such a merger – the combined entity would be worth close to $500B – make it unlikely to occur.
  • Exxon Mobil could be turned off by BP’s outstanding litigation concerns and costs as well as BP’s Russian investment in Rosneft.

Even well before Royal Dutch Shell (NYSE:RDS.A) made a $70 billion bid to buy BG (NYSE:BG), talks of the merger & acquisition market in the energy sector heating up have persisted for months. The Shell-BG merger it’s thought could just be the first domino.

Analysts are keeping an eye on other big name oil companies like Exxon Mobil (NYSE:XOM) and BP (NYSE:BP) as other firms that could be looking to make an acquisition or even combine in a merger themselves. Logically speaking, it would make more sense for the two companies to make acquisitions themselves to fill in holes in their businesses where they might be lacking. As oil prices have plunged, the value of energy stocks have dropped as well and the perception could be that many of these companies are now “on sale” and could fuel this additional M&A discussion.

This might possibly be why the Exxon Mobil-BP rumor continues to hang out there. Thanks to the litigation and cost surrounding the Gulf of Mexico oil spill in 2010, BP’s stock has remained virtually flat over the past five years. Using several valuation metrics, BP remains one of the cheapest major oil companies out there right now. It’s currently trading at just a hair over book value in a sector where the overall industry average is to trade at about 60% above book value. Moreover, BP carries a 6% dividend yield which is also one of the highest among the energy stocks.

Exxon Mobil might be particularly compelled to make a move. The company currently has a market cap of about $360 billion making it the second largest company in the United States. The Shell-BP merger would give the combined entity a $260 billion market cap which might make the folks at Exxon a little uncomfortable. A merger with BP would turn Exxon Mobil into a half trillion dollar giant.

Despite some of the reasons I think Exxon Mobil could be intrigued by a BP merger (BP’s relative valuation and potential cost savings as two reasons), I still think a merger between the two is unlikely.

First and foremost is the litigation uncertainty surrounding BP. The $18 billion number is the number that was set by a judge but that number is being appealed and there’s the potential for other penalties to be levied before everything is said and done. I don’t think Exxon Mobil would make a play until this black cloud is lifted. I believe they would want to know what the final outcome would be before committing. Granted, Exxon Mobil is a cash generating cow but I still think it’s good business sense to avoid undue risk.

Second, I just think a merger would just be too big. Combining the second biggest company with another $100 billion plus company to create a half trillion dollar super-company? I think there’s too much involved logistically to make such a mega-merger work. Could it happen? Of course. I just think it would be simpler for Exxon Mobil to buy a relatively smaller company like Occidental (NYSE:OXY) to fill out their balance sheet.

I also think there’s some political risk associated with BP’s Russian investment in Rosneft. The Ukranian conflict highlighted some of the risk involved in doing business with that area of the world. The Russian ruble troubles didn’t help. While I don’t think those issues are as prevalent now as they used to be they still might be enough to give a potential buyer pause.

Overall, I think we’ll ultimately see Exxon make a smaller acquisition as it did the last time that oil prices slumped. A merger with BP just seems slightly too ambitious even in the current environment where conditions are more ideal for such a merger to take place.

SOURCE

royaldutchshellplc.com and its also non-profit sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

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