Investing in oil: I wonder if a BP-Shell merger could be a possibility?

With the crude oil price stagnating around $40 for the past few months and no solution to Covid-19 yet in sight, investing in oil is a risky business and oil companies are out of favour with investors.

Premier Oil is merging with Chrysaor, and rumours abound that Tullow Oil might be next in line for a takeover. No less than 36 US oil and gas companies had declared bankruptcy by August. But with pressure piling on, even the majors are in trouble and as both Royal Dutch Shell (LSE:RDSB) and BP (LSE:BP) appear to be struggling, could a merger be on the cards?

It’s not out of the question. Back in 2004, a recognised energy analyst, Fadel Gheit, argued BP would make an ideal merger partner for Shell. Of course, it never transpired, and both continued to forge their own paths. But for BP and Shell, those paths seem to be increasingly similar.

Shifting from investment in oil

There is massive pressure on oil giants to clean up their act and move into renewable energy. The pressure comes from governments, activists, shareholders and consumers. All of whom are increasingly aware of the need to ‘save the planet’. Rystad Energy reports that the oil majors will need to streamline their portfolios massively if they want to improve cash flow, cost efficiency, and maintain their competitive edge.

Shell is restructuring and focusing closely on reducing costs to reach its net zero target by 2050. It confirmed this will mean changing the types of products it sells, such as low-carbon electricity and biofuels, hydrogen and more. BP is doing the same. They are now working towards very similar goals and a merger would allow for major cost-cutting initiatives to progress. It would also help them achieve their carbon-neutral targets more efficiently. 

No strangers to M&A

It may come as a surprise, but in the UK between 1932 and 1975, BP and Shell were merged in a joint marketing venture known as Shell-Mex and BP. It stopped making sense as the two companies were building independent paths internationally.

In 1998, BP merged with Amoco, in a deal considered the largest oil industry merger ever, worth around $48bn. At which time, BP Amoco became the largest UK company, with a market cap above $140bn. It also became the largest producer of oil and natural gas in the US. Shell is no stranger to mergers either, most recently its acquisition of BG Group, a UK oil and gas production company, which completed in 2016. 

As BP and Shell have long been considered rivals, there may be alternative companies that shareholders would deem a better fit for an M&A process. Other supermajors I think may consider a proposition are Chevron, ConocoPhillips, Eni, ExxonMobil, or Total. 

BP has a price-to-earnings ratio (P/E) of 13, earnings per share are 15p and its dividend yield is around 8%. Shell’s P/E is 6, EPS is £1.52 and the dividend yield is 5%. BP currently has a market cap of $42bn and Shell’s is around $35bn, confirming they’re no longer the giants they once were. Nevertheless, I think they still have plenty to offer and I’d buy shares in either of these companies. They have decades of experience under their belts, are restructuring to ensure survival, and they maintain a global reach.