Low valuations of European companies Shell, BP and Total raise the possibility of being bought by Exoon or Chevron
Exxon Mobil and Chevron are cashing in. Also Shell, BP and TotalEnergies, but investors value big US oil companies much more than European ones. This raises the question of whether Exxon or Chevron could undertake a transatlantic corporate operation.
The US duo’s valuation advantage is tangible, even though Shell’s 2022 results, released on Thursday, showed earnings doubling year-on-year, matching those of its US counterparts. It obtained separate records of 40,000 million in the year, and 9,800 million in the fourth quarter, thanks to a strong recovery in profits from liquefied natural gas (6,000 million); and it exceeded the forecasts of the analysts, of a profit of 8,000 million.
As previously reported, Shell raised its dividend by 15% in the quarter. It also announced a new $4 billion share buyback program over the next three months, unchanged from the previous three.
But Exxon, at 473,000 million dollars, and Chevron, at 331,000 million, are trading at 6 times the expected ebitda for 2023, twice the average of Shell, at 210,000 million, Total, at 154,000 million, and BP, at 109,000 million. . One reason is that as oil prices have soared, US drillers are looking more attractive than European ones, which are also betting on potentially less profitable renewables.
Imagine that Chevron or Exxon acquired BP for $170 billion, taking into account a 30% premium on its market capitalization, plus debt. The 19,000 million net operating profit after taxes expected by the British group for 2023, according to Refinitiv data, would imply a return of 11% on invested capital. This is well above BP’s cost of capital, which is likely to be around 9%. Citi analysts estimate that such a merger could create cost synergies worth 10% of BP’s $37 billion in operating expenses. This would raise profitability to 13%. It seems worth it. Other combinations in which Shell was involved show lower returns, but still adequate.
Financing, however, would be complicated. If Exxon were to structure the BP purchase as an all-cash deal, its net debt would skyrocket from 5% of total equity to an awkward 39%. While BP’s leverage hovered around that level during the pandemic, investors in the US group could push for a more conservative stock trade or a mix of stocks and cash. This would raise a number of questions.
One is whether US shareholders want the hassles of a mega-deal instead of the huge buybacks and dividends they currently receive. Any cross-border deal would give Chevron’s Mike Wirth or Exxon’s Darren Woods a big bet on continued high oil prices, and would also attract political attention. They may have to divest UK petrol station assets on competition grounds, and divest BP or Shell wind and solar assets that are part of UK decarbonisation plans. While BP’s assets in the Gulf of Mexico should be attractive to a US buyer, other parties are less so.
The other question is whether UK-based institutional investors want to own shares in a US driller less focused on developing renewables. Some are genuinely attracted to Shell, BP and Total’s vision of being the gatekeepers of the energy transition and therefore might demand a higher transaction premium or reject an offer outright. But even BP chief Bernard Looney seems disappointed with some of the returns from low-carbon investments, according to the Wall Street Journal. He plans, says the newspaper, to reduce his green bet (BP will present its fourth-quarter results on the 7th).
And despite the European groups’ environmental ambitions, shareholders have not rewarded them with higher valuations, raising doubts that they can make a profitable transition away from fossil fuels. Therefore, a US offer could test the ecological bona fides of the investors themselves.
