Business | Markets

James Moore: Enjoy the Shell-BG mega-deal - but BP may be next on the menu

 
James Moore
8 April 2015

Is Royal Dutch Shell’s mega-deal with BG merely the hors d’oeuvre to a truly massive main course?

There is a now very real prospect that its fellow oil major BP will be next on the menu.

Shell is paying a huge premium for BG, a 50%-plus bung to the latter’s shareholders when compared with last night’s close.

It’s worth it because the cost of finding and then developing the sort of assets which BG owns would cost far more, if it were even possible after the budget cuts imposed to allow Shell to navigate the chill waters of the present energy markets.

It doesn’t hurt that BG, which had been imposing brutal cuts of its own, was weak and unloved by the market after years of drift. So weak that it risked the wrath of shareholders, and just about everyone else, in ponying up a £25 million package (it was tweaked a bit after investors kicked up a fuss), to lure Helge Lund from Norwegian state oil company Statoil in the hope that he would be able to engineer a turnaround.

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They didn’t need to. BG always looked like the first domino to fall. If Shell hadn’t knocked it over, someone else would have. Chevron? Exxon maybe?

Certainly the latter was the choice of the chatterers and day traders for much of last year, but it might just have bigger ideas.

BP is also weak and unloved, shattered from years of legal battles over the Deepwater Horizon disaster in the Gulf of Mexico, most of which it has lost.

Those chatterers and day traders have also linked Exxon with a potential bid for the big dog. Why bother with BG’s chump change when you can get the real pot of black gold at the end of the rainbow?

No wonder BP’s shares were in demand this morning. The market thinks something is coming, because in the past it has.

Most of the names that I have mentioned are the survivors of the last flurry of mega-mergers, when oil prices similarly plumbed the depths at the end of the 1990s.

The modern BP itself is the product of deals with Arco and Amoco.

So it would come as no surprise if this predator turns prey. BG lights the way.

And lights the way home for Lund. There are some who would say that the controversial boss is worth the millions he will pocket given the size of the premium he has achieved.

The reality is that he sailed into Britain to open up the talks and then sign on the bottom line.

Fortunately, for him, the City is so excited by the prospect of another two or three of these deals that no one is going to make too much fuss about his pay-off.