BP CEO Retirement Creates M&A Rumors; Potential Regulatory Problems Exist

Stock Tickers: BP, RDS.A, XOM, COP, CVX, PTR, TOT, SNP

John Browne, the CEO of British Petroleum, or BP Plc, (BP-NYSE/ADR) has announced that he would be retiring at the end of June and would be succeeded by Tony Hayward (head of exploration and production).  In all honesty, this has been in the works since last summer, but the company gave 2008 as the original time frame he would be retiring.  Of course traders and M&A rumor mongers are taking the opportunity to say this could imply a merger between BP and perhaps Royal Dutch Shell (RDS.A-NYSE/ADR).  Rumors of this marriage have been around for quite a while. 

This would make two monster oil and gas powerhouses into a much larger monster powerhouse and that is undeniable.  One problem is that BP is the gem of the U.K. and Shell is the gem of The Netherlands.  The U.S. might not be able to say too much about a merger since it has not blocked a single deal in about 8 years, but there would be major hurdles to a merger of this size.  The E.U. would HAVE to study this for a long time, and they are more strict on mergers than the U.S.  The other group(s) that would be all over this is environmental and corporate/consumer watch groups.  The corporate and consumer watch groups would be screaming bloody murder, calling for bans and boycotts, and probably start lobbying against it here and abroad.  Since these companies also operate globally there are many downstream countries whose oil and gas are being drilled that might have a lot to say about this.  This would take quite a while to close and you can imagine that many of the countries these operate in would also have issues to bring up about this.

So here are the issues, BP has an US-equivalent market cap of some $211 Billion, and Shell’s market cap is harder to calculate because of the recent share buybacks and because of share consolidation but it is also huge.  Many private reports have claimed that all the mergers make energy less and less competitive (and just as many industry-sponsored reports claim the opposite), and if this rumor of a merger were to come to fruition you should just expect another wave of mergers in the US and abroad in the entire energy patch.

ExxonMobil (XOM) has a $417 Billion market cap, Total SA (TOT) has a $307 Billion market cap, PetroChina (PTR) has a $227 Billion market cap, ConocoPhillips (COP) has a $104 Billion market cap, Chevron (CVX) has a $151 Billion market cap, China Petroleum (SNP) has a $72 Billion market cap.

With what everyone has to pay for gas these days it is unlikely that consumers would go for this deal at all.  Anyway, that’s my take on it.   

Jon C. Ogg
January 12, 2007

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Jon Ogg is a partner in 24/7 Wall St., LLC; he does not own securities in the companies he covers.