What’s next for Royal Dutch Shell (LSE: RDSB)? Is a multi-billion merger with BP (LSE: BP) just around the corner?
Don’t hold your breath.
Time To Bet On Oil & Gas Deals?
The press and some analysts speculate that Shell could snap up BP for just 500p a share, but Shell would face an uphill struggle if it tried to buy BP on the cheap. Equally important, Shell ought to remain independent to create value for shareholders at this point in the business cycle. Its restructuring plan has just started and will take time to yield dividends, in my view.
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Takeover rumours in the oil industry often emerge when oil prices weaken, and this time is no different. A Shell/BP tie-up would have to be financed by Shell equity, and is unclear why BP shareholders would want to hold Shell stock right now, unless a big premium were offered. Regulatory hurdles won’t be easy to overcome, which heightens execution risk.
Other possible scenarios have been rumoured in the last few days. So, how about a merger with Exxon?
Well, just forget about it. If Exxon decided to team up with a major oil company, that would be BP. As far as a restricting play such as BG is concerned (another possible target for Shell), it’s highly unlikely that Shell will go for it.
If Shell risks a multi-billion takeover, its shareholders could be the ultimate losers at a time margins are strained, the cost of extracting oil and gas is on its way up, and a few projects are pushed back or cancelled.
How Much Is Shell Worth?
This is not an easy call.
A price target of £30 is way off the mark if Shell doesn’t become more aggressive in its corporate strategy. In short, it must be quick to get rid of under-performing assets.
Additional cost savings may be high on the agenda. “BP is to axe middle managers and freeze projects as it grapples with the plummeting oil price,” The Sunday Times reported on 7 December.
I would expect similar announcements from other oil majors, including Shell. Earlier this summer, Shell said it would cut about 250 jobs in Aberdeen and would try to render its operations in Canada more efficient.
At a time investors have turned bearish on the oil sector, this may be an opportunity to bet on Shell and other vertically integrated oil majors, which could offer a 5% to 10% pre-tax capital gain into January 2015. Between May and September, Shell stock traded much higher and wasn’t far away from the £30 mark. Investors may have overreacted in the last few weeks. If that holds true, Shell stock should be added to your portfolio before the company reports fourth quarter and full year results on 29 January.
