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European energy companies were trading at a nearly 50%
discount to U.S. rivals on a price to cash flow basis in November. But BP’s
particularly cheap valuation and fragmented ownership could turn it into a
hostile takeover target. Its market valuation slipped to just 3 times its cash
flow for the next 12 months, well below the 4 times fetched by Equinor, larger
British rival Shell (SHEL.L) and French competitor TotalEnergies (TTEF.PA),
LSEG data show. Also, Equinor had over $10 billion in net cash at the end of
September, while these two rivals held more debt than cash.
Working on a defence strategy by capitalising on existing
business ties would make sense. In 2020 BP became a green partner to Equinor
through the $1.1 billion acquisition of a 50% stake in its U.S. offshore wind
projects. The duo has also stood out as planning to spend more than rivals on
low-carbon assets: BP has pledged to invest between $7 billion and $9 billion a
year by 2030 in businesses including electric-vehicle charging, biofuels and
hydrogen. That would be equivalent to half of its projected annual capital
expenditure, up from 30% in 2022. At over 50%, Equinor’s non-oil spending
target is similar. TotalEnergies, in comparison, expects to devote only about a
third of its capital to low-carbon ventures. Finally, BP Chairman Helge Lund,
who led Statoil – before it was renamed Equinor – for a decade until 2014,
provides the UK group with a strong Norwegian connection.
A merger would bring financial benefits. Shell’s purchase of
BG Group led to annual pre-tax savings of $4.5 billion, or 1.5% of their 2015
revenue. On that basis, a tie-up of BP and Equinor could generate synergies
worth $4.8 billion a year on combined 2024 revenue of $317 billion, per LSEG
forecasts. Through BP, Equinor would gain a bigger international footprint and
greater exposure to the lucrative liquefied natural gas segment and green
industries in the U.S. and Asia. This would help the Norwegian major to
diversify away from gas pipeline exports to Europe, which are set to shrink.
Equinor would also take on BP’s much larger oil trading arm.
BP, meanwhile, would be in a stronger position to keep
investors happy. The UK company has pledged to return 60% of its surplus cash
flow to shareholders. Equinor’s high-margin Norwegian oil and gas operations
could boost payouts and provide capital for green investments.
There’s one major hurdle. The Norwegian state, which owns
70% of Equinor, may be reluctant to lose majority control. Yet a transaction in
which the Scandinavian group offered a 30% premium through shares and some $10
billion in cash would see Oslo remain the top shareholder with around a third
of the enlarged company, Breakingviews calculates. That would give Norway
enough heft to control the board and block unwanted strategic moves. Elsewhere
in Europe, the Italian and Finnish states hold 32% and 36% respectively in
national champions Eni (ENI.MI) and Neste (NESTE.HE). Paris cut its stake in
TotalEnergies to less than 1% in the 1990s.
If Lund can make a strong case at home, a $200 billion-plus
European energy major with a shared climate vision could become a reality.
BP announced on Sept. 12 that CEO Bernard Looney had
resigned with immediate effect after admitting he hadn’t been “fully
transparent” about past relationships with employees. Murray Auchincloss, the
company’s CFO, has been since acting as interim CEO while the company seeks a
permanent solution.
Chairman Helge Lund, who ran Statoil – before it was renamed
Equinor – for 10 years until 2014, favoured an internal hire in the aftermath
of Looney’s departure, but no preferred candidate has emerged 10 weeks later,
according to people with knowledge of the process, the Financial Times reported
on Nov. 24.
BP said both internal and external candidates were being
considered in the search for a permanent replacement. -Reuters
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