Last year, British multinational oil & gas giant, Shell Plc (NYSE:SHEL) threatened to delist from the London Stock Exchange (LSE) and list on the New York Stock Exchange (NYSE). Shell CEO Wael Sawan told Bloomberg that the company is grossly undervalued in London due to shareholder apathy to the oil and gas sector. Sawan also expressed deep frustration by investors' under-appreciation of the financial performance of the company, as well as the British government’s over-taxation of its profits. Sawan vowed to “look at all options”, including switching the group's listing to New York in a bid to close the valuation gap with American Big Oil companies Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX). A U.S. listing might make even more sense now that Trump is in office thanks to his pro-fossil fuel policies.
The UK government, however, will be wishing for Shell to stay put as it looks up to Europe’s biggest oil and gas company to save the British crown jewel, BP Plc (NYSE:BP). Shell moved its headquarters from Hague to London in 2022 as part of a broader corporate restructuring, including simplifying its share structure, dropping "Royal Dutch" from its name, and shifting its tax residence to the UK. Over the past couple of years, rumours have swirled in the industry that BP might be open to a merger, with its shares struggling after CEO Murray Auchincloss' fossil fuel-focused strategy reset failed to win over markets. U.S. activist investor Elliott Management has acquired a 5% stake in BP, and is using his fire power to push for changes including cost cuts and potential changes in leadership.
There are several reasons why such a merger would make sense. For starters, Shell has the wherewithal to pull off such a deal, thanks to its $218B market cap compared with BP’s $92B. Further, despite its recent struggles, BP has an impressive oil and gas portfolio, including onshore shale basins in the U.S. and the Gulf of Mexico, Brazil, the North Sea and the Middle East. BP produced 2.36 million barrels of oil equivalent per day last year, generating $8.9 billion in net profit.
BP also owns one of the biggest and most successful oil trading desks in the world.
Whereas several U.S. oil companies have tried their hand at oil trading, it’s European oil and gas supermajors that have perfected the art and science of leveraging volatile oil markets to reap big profits. To wit, Exxon Mobil (NYSE: XOM) famously ditched its effort to build an energy trading business to compete with those of European oil majors after a period of low oil prices forced the company to heavily cut the unit’s funding amid broader spending cuts. BP, on the other hand, has managed to build one of the most successful energy trading ventures by an oil and gas major. BP’s trading desk has been astute at taking advantage of highly volatile energy markets in the past, with former CEO Bob Dudley and his army of 3,000 traders displaying an uncanny ability to predict the oil price trajectory. For instance, Dudley famously told the media that “Prices will remain low for longer,” after oil prices plunged to their lowest in more than a decade in 2016. Indeed, Dudley authorized a daring trade that saw BP place a large bet on a rebound in oil prices. BP was already heavily exposed to (low) oil prices, yet it chose to double down in a bid to increase the exposure by buying futures contracts much as a hedge fund would. A former BP executive with direct knowledge of the trade told Bloomberg that BP “made a lot of money” from that bet.
The UK government would certainly favor a Shell takeover of BP, being loath to lose its ability to leverage the company to wield soft power by letting the company be snapped up by a foreign rival, including Middle Eastern oil giants. Last year, Iraqi oil ministry officials revealed that BP will develop Iraq's Kirkuk oil and gas fields based on a profit-sharing model. The oil ministry and BP are expected to sign a confidentiality agreement in the current week, after which Iraq will hand over the data package for Kirkuk's four fields and installations. According to the officials, Kirkuk oil fields are currently producing 245,000 barrels of crude per day. Iraq is OPEC’s second largest producer after Saudi Arabia. Iraq's economy relies heavily on crude oil exports, with crude accounting for more than 90 percent of the country's revenues.
That said, it would be interesting to see if Shell would be interested in buying its British peer. A big challenge for a potential tie-up would be the fact that it does not necessarily align with the ethos of Shell CEO Wael Sawan, who is focused on cutting costs and narrowing the business’s focus to liquefied natural gas (LNG). On the other hand, Shell is one of the oil majors trying to expand their trading desks, and buying BP would be a slam dunk in that regard.
By Alex Kimani for Oilprice.com
More Top Reads From Oilprice.com
- Goldman Sachs Cuts Oil Price Outlook Amid Oversupply Fears
- United States Challenges China’s Mineral Dominance
- Elliott Wants More Buybacks From Germany’s RWE After Buying 5% Stake
