Ah, I’ve been waiting for this to happen … the mega-mergers derby to begin, the starting gun being the current oil price slump.
And it turns out to be Shell that got out of the gate first, which might surprise a few stock market pundits who know far more than ever I will about deal making or indeed horse racing form than I ever will.
However, unless you count the company’s $4.5-5billion takeover of Enterprise Oil in 2002, then Shell was conspicuously absent from the Mega-mergers Cup Race sparked by the late 1997 through 1999 oil price slump that sparked consolidation among a crop of listed Western oilcos and big supply chain brands.
Naturally, there’s been a heap of punditry spewed so far as a result of Shell deciding that it wants to pick off BG Group.
However, even I can see a number of good reasons for this particular deal, particularly on the assets portfolio front. And so-on and so-forth.
Of course, there’s time enough for someone else with an eye for form to beat Shell to its BG Group prize; and the company would appear to be quite a catch despite its current issues.
Don’t forget however, in February, the UK’s third largest oil & gas business reported that 2014 had been a rubbish year, not least because the company had taken an $8.9billion hit on the value of its gas pipelines and production assets as lower oil prices send the FTSE 100 energy company into a loss for the full year.
BG Group also said that a “sharp deterioration in commodity prices” had led to $6.8billion write down of assets in Australia.
In short, the firm slumped to a loss before tax of $2.3billion for the full year, down from a pre-tax profit of $3.9billion in 2013. And it decided that the axe would have to be swung on projects too, with forward investment slashed from $9.4billion last year to $6-7billion this year.
As for its share price, this has been butchered like every other listed oilco that I know of thanks to the oil downturn. This is of course reflected in its market capitalisation.
Let’s assume Shell gets past the post with its BG Group bid … a deal is never done until it is signed, sealed and delivered … then will the relationship actually work out?
Statistically, the chances are that it won’t. It’s a proven fact that big deals by and large fail, though that is invariably wallpapered over, or at the very least don’t achieve the objectives intended.
Significant insight into the failure of mergers can be found in a study conducted by McKinsey, a global consultancy that oil majors like to be associated with, or at least they did in the late 1990s as they jostled to achieve top quartile performance.
In a nutshell McKinsey came to the conclusion that companies often focus too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer.
Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders.
Does this sound familiar? Check out almost any mega-merger press statements and most of those weasel words will be present.
Do some research into the following crop of deals … the biggies of the late 1990s crunch and come to your own conclusions as to which seems to have worked out and which maybe did not.
Chief among the deals were:
Oil companies: BP-Amoco ($57.4billion); Mobil – Exxon ($91bn), Repsol – YPF ($13.4bn), Total – Fina then Elf ($48bn), Statoil with Norsk Hydro acquired Saga; Chevron – Texaco ($36billion).
Supply chain: Halliburton – Dresser ($8.7billion), Baker Hughes -Western Atlas ($5.1bn), Schlumberger – Camco ($3.3bn), Transocean – Schlumberger Sedco Forex ($3.2bn), EVI -Weatherford ($2.7bn), PGS – Awilco ($0.9bn); and so-forth.
So who could be next for the chop, I wonder; or to stay with the horse racing analogy (I know nothing whatsoever about the sport, by the way), who is being lined up in the starting gate?
At the end of last year, Bloomberg speculated that Tullow was ripe for the picking. The company did brilliantly in Ghana and Uganda but then went off the boil somewhat, though is generating loads of cash thanks to good production.
Suitors touted include: ExxonMobil, Total and the Chinese state player CNOOC.
Motley Fool agrees and is also pushing Premier Oil, Petrofac and Wood Group.
Consider Premier, a company that was founded way back in 1934, which has promised so much along the decades and yet has a market cap of just $1.2billion.
Despite last year’s write down in the value of its asset base, Motley seems to think the company will bounce back next year, with earnings growth of 114% being forecast. What baffles me is why Premier wasn’t taken out long ago.
Petrofac and Wood have been speculated over by various pundits over the last several years, and not just Motley. Personally, I hope neither gets eaten, and especially Wood which, in Motley’s own words “remains a very solid business which has a balance sheet that is not overleveraged.
Furthermore, it has a yield of 3%, which is an indicator of its financial health, as well as its relatively appealing valuation. In fact, Wood Group trades on a P/E ratio of just 12.6, which makes its shares a steal at the present”.
That may be so but the very idea that Wood could get taken out, most likely by foreign interests come the day, is anathema to me.
And so back to Shell. Here’s a teensy bit of food for thought. Its market cap in 2000 was around $206bn, in 2010 it was around $220bn, today it’ guess what, $206billion. It’s taken 15 years to get nowhere, at least in Market terms.
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