Merger and acquisition activity in the United States oil and gas industry last year slumped to the lowest in 17 years as buyers became pickier. But besides being picky, they were also willing to spend, Enverus reported earlier this week. Now, Citi analysts are suggesting they may get even more generous with acquisitions. BP and Shell, the European supermajors, could become acquisition targets for their American peers Exxon and Chevron, the bank’s analysts said in a note this week, arguing that the Europeans’ stocks have been affected by attitudes towards ESG investing and the energy transition, turning them into a potential value proposition for the American supermajors.
“The CoE of European oils remains handcuffed by investor and political headwinds,” Citi analyst Alastair Syme said in the note, as quoted by Proactive Investors. “What is really needed is for the industry to arbitrage this value itself.”
“We look at the strategic imperative, financial accretion and political headwinds of either of the two US IOCs (Exxon or Chevron) potentially looking to try and acquire one of their key European competitors (BP, Shell or TotalEnergies),” Syme also said.
According to the bank, the two European supermajors are currently trading at a discount of more than 40 percent to Exxon and Chevron, MarketWatch reported, citing the same note. The analysts, however, noted that most of this discount comes from a general premium that U.S. stocks enjoy over European ones.
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Yet some of the discount comes from the political realities of Europe, where pressure is strong on investors to shun the oil and gas sector like the plague and focus instead on low-carbon energy opportunities. The oil price rally from last year and the upbeat forecasts for current and future oil demand have done nothing to change that sentiment.
“The prize for the U.S. IOCs would look considerable, with value uplift coming through the ability to fund at a lower [cost of equity] as well as cost-synergies that we estimate in [net present value] terms in the region of 15-30% of target market-cap,” the Citi analyst team wrote.
This would be quite a lucrative opportunity if Exxon and Chevron start to feel like growing inorganically. They might well do that, too, after a strong year and another on the way as the oil market supply and demand situation remains in precarious balance, with the danger of a shortage always lurking behind the corner.
So, the American supermajors may well have the money to snatch BP or Shell, and according to Citi, the European competition authorities are unlikely to put up much of a fight, if at all. In fact, the bank’s analysts suggested the European political circles may be glad to see the supermajors gone.
“European politicians would undoubtedly rattle their sabres, but given they have already set out an anti-oil narrative it seems unlikely they would intervene directly. Competition authorities are unlikely to put up blockers, at least not enough to remove the value-accretion potential,” Citi said.
Of course, as MarketWatch points out, if the hypothetical scenario does materialize and a European supermajor becomes part of an American one, spending on renewables will decline—probably sizeably—and that’s hardly something the anti-oil political lobby in the EU would like to see.
On the other hand, that would be happening far from European shores, so they might decide to look the other way, pretty much the way they did with all that American wood being shipped to Europe under the label biomass and burned as a renewable source of energy.
The only real question then is whether either Exxon or Chevron are in the mood to make such a huge buy when they can sit and repurchase their own stock and boost dividends as they watch oil prices climb higher.
By Irina Slav for Oilprice.com
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