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Why consolidation will be key for oil companies

Oil companies are survivors: Shell, BP and ExxonMobil each date back more than a century. After surviving wars, pandemics, depressions, gluts and nationalisations, they had begun to grapple with a new existential challenge: how to transform themselves in the era of climate change. Now the coronavirus crisis threatens to derail the big oil companies’ emerging plans.

Consolidation is inevitable, in the style of welding together two car wrecks to make a half-viable vehicle. Very cheaply, a supermajor could build a business to rule all shale – but it would be a huge gamble.

Eni, Total and Equinor are probably politically untouchable, and a transatlantic tie-up looks ideologically unlikely, leaving only Shell-BP or acquisition or mergers of smaller companies such as Repsol, OMV or Wintershall.

Shell has raised its dividend every year since the Second World War. With the collapse in share prices, implied dividend yields have reached extraordinary levels: 10 per cent for ExxonMobil, 12.4 per cent for BP, 14 per cent for Shell. But how long can such payouts be sustained if oil prices drop below $20 per barrel?

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