Shell-BP fantasy M&A has some grounding in reality2 Aug 2024 05:36
LONDON, Aug 1 (Reuters Breakingviews) - Two decades ago, when John Browne was running BP and the UK oil major was worth more than Shell, his advisors used to run the numbers on a potential tie-up. In 2024, a reversal of fortunes gives cause for Shell boss Wael Sawan to do so too. While a merger remains hypothetical, certain aspects of it make sense.
Sawan, who on Thursday presented second-quarter results that exceeded expectations, doesn’t need a deal. Since taking over in January 2023, his $229 billion group’s shares have risen 20%, with investors seemingly appreciating a more disciplined approach to the energy transition and a renewed focus on fossil fuels. Meanwhile $97 billion BP’s share price is off 5%, underperforming both its UK-listed peer and U.S. majors like Chevron (CVX.N), and Exxon Mobil (XOM.N),
Still, with BP’s market value including net debt now just 2.8 times 2025 forecast EBITDA, and Shell’s at 4.3 times, there’s an increasing chasm between equity values. At 104 billion pounds ($133 billion), the gap is nearly as wide as it’s been this century, according to LSEG data. Given the deal bonanza undertaken by U.S. majors of late, Sawan will be watching with interest.
In Exxon Mobil’s late-1990s merger, estimated cost savings were $2.8 billion on smaller Mobil’s $10 billion of general and administrative costs, per an industry expert. Assume the same 28% saving on the $17 billion of BP expenses categorised as “distribution and administration” in 2023. Cost synergies could exceed $4.5 billion a year before tax.
Applying a 30% corporate tax rate and capitalising 10 times, the savings could be worth over $33 billion in today’s money — exceeding the $29 billion premium if Sawan offered 30% more than BP’s market capitalisation. The return on invested capital before synergies would be 12%, assuming $25.8 billion of BP operating profit for 2025 from LSEG-compiled forecasts, $23 billion of net debt, and a 30% tax rate. Sawan could also pay in shares rather than cash.
Still, Shell-BP would come with obvious drawbacks. With both companies over a century old, there’s scope for a big culture clash and disquiet over job losses. In sectors like retail sites, aviation supply and lubricants, competition authorities may require disposals. And when Exxon and Mobil merged in the late 1990s, Brent oil prices languished around $15 a barrel — a fraction of the $80 today. That means Exxon and Mobil were saving a lot more per barrel than if Shell and BP decided to merge today. BP’s board might also demand a much higher premium.
Still, if oil prices slumped, as occurred in 2020, Sawan might not need to pay up. Alternatively, if a non-Shell suitor appeared — like Abu Dhabi National Oil Company briefly did — Shell’s hand might be forced. Shell-BP remains fantasy, but that doesn’t mean it’s worth dismissing.
https://www.reuters.com/breakingviews/shell-bp-fantasy-ma-has-some-grounding-reality-2024-08-01/
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