Last week’s move by Shell (LONDON:RDSa) to acquire BG Group (LONDON:BG) for close to $70bn has helped put a floor under the oil and gas sector and got markets in a fevered frenzy as to who might be next in the M&A spotlight.
The last time investors saw deals of this size was way back in 1998 when Exxon and Mobil merged at a cost of $73bn, and BP (LONDON:BP) bought Amoco for $48.2bn.
The steep falls in oil prices seen in the last 9 months, as well as geopolitical tensions caused by events in the Ukraine and Russia, has seen margins squeezed and asset valuations hit across the sector, where those assets have been exposed to US and EU sanctions against Russian assets.
Since June last year Brent crude prices have declined from $115 to lows of $45, and it is these falls that have hit share values in the oil and gas sector quite substantially in that period.
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The major oil companies more than most, have been able to absorb the impact of the sharp drop in prices by cutting back on capital projects, and laying off workers, with the share price performance of Royal Dutch Shell, Exxon Mobil (NYSE:XOM) and BP pretty much identical in the period since the beginning of May last year.
The worst performer in that time has been Africa based Tullow Oil (LONDON:TLW),though its shares have jumped sharply since last week’s Shell bid for BG Groupas have BP’s shares in anticipation of a bid from Exxon Mobil.
BP’s woes in recent years have certainly put it in the spotlightand have been played out in plain sight in front of the world’s media, and in the past the beleaguered UK Company has been linked with its more conservative peer Royal Dutch Shell.
Given the problems facing the oil industry right now it certainly makes good news copy for BP to be considered as a potential takeover target, and now that Shell is out of the running the only company capable of making a bid is Exxon Mobil, and speculation has continued to build that BP might be in play.
Let’s consider that for a moment because if it happened any bid would be up there amongst the ill-fated Vodafone/Mannesman and AOL Time Warner acquisitions and neither of those ended particularly well.
With all the disposals BP has made in the past 5 years the company still has a market capitalisation of £87bn, which at current exchange rates is over $125bn, and any bid would need to be at a premium to that price, so any purchaser would be looking at an indigestion inducing valuation in excess of $150bn at the very least.
In addition to that Exxon would also have to consider the continued uncertainty about BP’s Macondo Gulf of Mexico liabilities, which are ongoing in the US courts, and will likely continue to be so for several years given that the longer term damage to the Gulf coast is still being assessed.
The US oil giant does have experience of its own in respect to litigation costs, given what happened in Alaska in 1989, in Prince William Sound, and over which it is still involved in litigation.
On this basis alone this holds lessons on BP’s liability for the Gulf of Mexico spill which was 20 times bigger than the Exxon Valdez, and is likely to be an additional consideration in weighing any offer.
Furthermore having been hit hard by US sanctions on Russia Exxon Mobil is hardly likely to want to double up on them by taking on BP, who has Russian assets of their own through their linkages with Rosneft.
All of these factors make any potential tie up extremely unlikely and that’s before you even consider the regulatory obstacles that would have to be overcome, which would probably make any acquisition much less attractive.
In short, I would suggest there’s more chance of Green leader Natalie Bennett becoming Prime Minister than this merger taking place.
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