A big and sustained fall in the oil price can be relied on to set off a wave of takeovers in the industry.
Smaller companies suddenly find their costs and debts are too burdensome, while the big operators see the chance to cut expenses and pick up long-term assets cheaply.
Royal Dutch Shell’s agreed takeover of BG sent shares of other oil and gas companies up on Wednesday as investors bet that there would be further moves by big companies to snap up smaller competitors.
Ophir Energy, the oil and gas explorer, was the second-biggest gainer in the FTSE 350 index after BG, rising 7.4%. Shares of Tullow Oil and Nostrum Oil & Gas also jumped and even BP, Britain’s other major oil company, rose slightly.
The last round of energy industry takeovers was in the late 1990s when new production in the North Sea, Alaska and Mexico caused the oil price to collapse. In response, BP bought Amoco and Arco, Exxon snapped up Mobil to form the world’s biggest oil company and Chevron merged with Texaco.
This time round it has been booming US shale production, faltering demand from China and other emerging economies, and Opec’s reluctance to cut production that have sent the oil price down by half since the peak of $110 a barrel last summer. Shares of Tullow and Premier Oil have nearly halved in the past year.
Christian Stadler, an associate professor at Warwick business school, said Shell had missed out on the last merger boom because its complex Anglo-Dutch share structure made it hard to pay for deals. This time round it has got its prize and that could set off another round of consolidation.
Stadler said: “If Shell takes over BG it could be the beginning of a new wave of mega-mergers in the sector. Quite a few oil companies are under cost pressure with no sense of the oil price recovering. Companies had got used to $100 a barrel, and many need $40 to $60 to break even, so we could see more of these deals.”
There are plenty of weakened companies that could be snapped up but, though the majors have been hit far less hard, Shell will be occupied with BG and few others are strong enough to do a deal approaching that size.
Pascal Menges, the manager of the Lombard Odier Global Energy Fund, said: “Only Exxon has the flexibility to do big-ticket deals like BG Group. In contrast, Total, Eni and Statoil will have to content themselves with the pick ’n’ mix counter.”
BP might have been expected to join a merger wave as a buyer but it is still weighed down by legal battles in the US from the Gulf of Mexico oil spill in 2010.
Instead, BP could find itself the target of a takeover. The deal most commonly mooted by analysts is a bid by ExxonMobil to combine the two companies’ US businesses. After Shell’s move for BG, the US giant may feel emboldened to act.
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