Low oil price raises prospect of fresh merger wave

Oil prices were at multiyear lows. The world's largest oil and gas companies were slashing jobs and cutting spending. But their stock prices were sagging and executives were under pressure to replenish reserves.

The situation sounds like the backdrop to Wednesday's announcement by Royal Dutch Shell, the oil group with a market value of nearly £127bn, that it plans to buy smaller UK rival BG Groupfor £47bn excluding debt.

But similar conditions existed in 1998. Back then the oil industry reacted by unveiling an unprecedented string of megadeals, which created the consolidated behemoths that dominate the energy market today.

In just under two years starting in August 1998, five large transactions remade the industry, beginning with BP's $54.8bn takeover of Amoco of the US and Exxon's $85.6bn acquisition of its US rival Mobil.

The combinations were intended to allow the newly formed "supermajors" to improve profitability by cutting out duplicated functions and developing the best assets of the merged groups.

The question today is whether Shell's deal for BG will prompt a similar reaction, given expectations that oil prices will fall further.

Bankers, however, are not expecting another wave of consolidation among the biggest oil companies such as ExxonMobil, BP, Total and Chevron.

"We are probably not going to get the real giants getting together this time around," said one banker who has followed the industry for years.

That scepticism, shared by many, rests on the likely complexity of further consolidation among the biggest oil companies.

Exxon of the US would be likely to face stiff political resistance if it made a much-mooted run at BP, stemming from legal issues the British oil company is facing in the US following the Deepwater Horizon disaster in 2010.

Bankers say the deals this time are more likely to be acquisitions that help big oil companies gain access to reserves that may have lower production costs. Shell has done that by acquiring BG's attractive assets in Brazil and Australia.

Michael Alsford, oil and gas analyst at Citigroup, said the fall in oil prices had highlighted the relatively high costs associated with many of the majors' portfolios. "All big oil has the same issue: they are underexposed in low-cost production areas. This is not a Shell-specific problem," he said.

"This deal has come a bit earlier than we expected. Companies are still focused on cutting costs, but we see big oil using mergers and acquisitions to reposition their portfolios."

<

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.

But doing deals is hard at the moment, because buyers and sellers often have differing views on the price at which oil will stabilise, and therefore the value of target companies. Another banker said: "Volatility is not the friend of M&A, and we don't expect significant activity to occur until the volatility has subsided."

Even though dealmaking conversations have picked up in recent weeks, disagreements on pricing remained a problem, bankers said. "The majors and mini-majors will be interested in making acquisitions, ideally for cash, but willing sellers for a cash deal are difficult to find because of the differing views on where oil and gas prices will stabilise," one of the bankers said.

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation