Whenever cyclical volatility and uncertainty hit the energy markets, consolidation becomes the order of the day as oil and gas majors go on the prowl. Oftentimes, the urge to add attractive large offshore drilling projects and viable acreages of rivals or smaller companies is too good to resist for the big guns.
Furthermore, uncertain times make the buyer-seller gap on valuation easier to bridge. Given the current state of affairs, with a $100 per barrel oil price still appearing to be an elusive pipe dream, two supermajors recently decided there is no time like the present.
On October 11, 2023 ExxonMobil
XOM
announced an agreement to acquire Pioneer Natural Resources
PXD
for around $59.5 billion. A mere ten days later, rival Chevron unveiled its deal to acquire Hess Corp.
HES
for around $53 billion. Both deals would be all-stock transactions subject to completion.
Forget minnows, is a supermajor vulnerable?
Greeted with megadeal mania, both markets and investors are left wondering who could be next and which company is ripe for the taking? There is already market chatter about ConocoPhillips
COP
and Devon Energy
DVN
sniffing around Permian operator CrownRock.
Callon Petroleum, Diamondback Energy
FANG
, Permian Resources Corp., SM Energy and Vital Energy are all on my radar as potential takeover targets for Big Oil. But could a supermajor itself be vulnerable? If so, FTSE 100 energy blue chip BP (LON: BP) is the most obvious candidate.
Even before anything else is taken into account, it must be noted that the London-listed supermajor trades at a considerable discount to its U.S. rivals. Add to it, BP’s share price performance has been woeful in recent years compared to its peers. The current year has not been much to write home about either. From a high point of 567.6p ($7.13) per share on February 16, 2023, BP’s shares are currently languishing around 480p (11:30 EDT, November 7, 2023).
While rival Shell has stepped up its share buyback program, BP reduced its own down from $2.75 billion down to $1.75 billion to its current level of $1.5 billion this year. Former CEO Bernard Looney’s unceremonious departure, a waiting game over his potential successor, and a 70% decline in latest quarterly profits hasn’t helped matters either.
The company’s current market cap stands just north of £82 billion ($101.5 billion). Such a price tag would make it difficult even for a rival supermajor to bid for it. Perhaps that’s what gives interim CEO Murray Auchincloss some measure of confidence to rubbish speculation about BP being a takeover target.
Vulnerabilities are obvious, potential suitors aren’t
However, many in the market remain unconvinced and find it extraordinary that Auchincloss had to bat away questions about a takeover in the first place. Should a friendly suitor or a hostile predator emerge, a cash and shares or an all-share deal are both within the realms of possibility.
While BP’s vulnerabilities and lackluster performance are plain to see, potential suitors aren’t so obvious. Both ExxonMobil and Chevron remain obvious candidates. However, both have already opted for sizable deals stateside. It also hard to see how the U.K. government will allow an important and strategic company like BP to relinquish majority British control, and de-list from the London Stock Exchange.
That leads many to believe domestic rival Shell (LON: SHEL) could be the obvious suitor. Such speculation – last dusted up when BP was at its lowest ebb following the Deepwater Horizon disaster of 2010 – is not new.
The arguments for and against it are pretty familiar too. Such a merger would create a London-listed “British” energy champion. But the sizable Dutch end of the Shell’s would not be all that happy with a further dilution, having had to recently contend with the company moving its headquarters from The Hague to London, as well as a dropping of “Royal Dutch” in what was formerly Royal Dutch Shell.
Competition concerns are also likely to be mammoth for the merger to be approved, but aren’t impossible to overcome. Finally, the disconnect between both companies on BP’s valuation will likely be large. BP’s majority shareholders would likely seek at least a 1X multiple (or doubling) of the company’s current price, something Shell shareholders may not be prepared to agree to.
Overall, BP appears safe for now. But in an industry built on megadeals and big ticket mergers and acquisitions, quite frankly anything is possible.
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