Buzz about a possible merger between the titans of pollution, Shell and BP

Posted by John Donovan: 1st August 2024

In a plot twist straight out of a corporate soap opera, there’s buzz about a possible merger between the titans of pollution, Shell and BP. Two decades ago, BP’s John Browne fantasized about buying out Shell, but now the tables have turned, and Shell’s boss Wael Sawan might be toying with the same idea. While this merger remains as real as unicorns, some bits of it almost make sense.

Sawan, fresh from presenting second-quarter results that had analysts wiping their tears of joy, doesn’t really need this deal. Since he took over in January 2023, Shell’s $229 billion behemoth has seen shares climb 20%, all thanks to a disciplined approach to pretending to care about the environment while doubling down on fossil fuels. Meanwhile, BP, with its $97 billion market cap, has seen its shares drop 5%, underperforming not just Shell but also American giants like Chevron and Exxon Mobil.

Despite the gap, Sawan’s eyes might be twinkling with merger dreams. BP’s market value including net debt is a measly 2.8 times its forecast EBITDA for 2025, compared to Shell’s 4.3 times. This nearly century-high chasm, according to LSEG data, might be too tempting to ignore. If the Americans can do it, why not Shell?

Back in the late ’90s, Exxon’s merger with Mobil saved them a cool $2.8 billion on $10 billion of expenses. Applying the same 28% savings on BP’s $17 billion in 2023, Shell could potentially see cost synergies exceeding $4.5 billion a year before tax. After a 30% tax cut and capitalizing ten times, those savings might be worth over $33 billion today, which is more than the $29 billion premium Sawan would need to offer for BP. And hey, if Sawan pays in shares rather than cash, it’s almost like getting a free lunch!

But let’s not pop the champagne just yet. Shell and BP merging could be like trying to mix oil and water—big culture clashes and job losses would be inevitable. Competition authorities might demand asset disposals in sectors like retail sites, aviation supply, and lubricants. Plus, back in the ’90s, Exxon and Mobil benefited from oil prices around $15 a barrel, unlike today’s $80, making their savings per barrel look like a clearance sale.

If oil prices nosedive like in 2020, Sawan might score a bargain. Alternatively, if another suitor like Abu Dhabi National Oil Company steps in, Shell might have to scramble. Shell-BP remains a corporate fantasy, but with the drama surrounding it, maybe we shouldn’t dismiss it outright.

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