Would Shell and BP creating a £200bn oil behemoth actually be a good idea - for anyone?

Independent

6 hours ago

Takeover or merger talk around British oil giants Shell and BP is not new, but has certainly ramped up this year amid diverging fortunes.
Reports on Wednesday that the former were in talks to bid for the latter were quickly rejected, but speculation and questions remain.
Combining the third- and eighth-biggest firms on the London Stock Exchange to create what would be the biggest FTSE 100 firm would generate plenty of interest. And a combined £211bn market capitalisation - total company values by share price - would be a fine look on the face of it.
But there's a lot more to consider than just a mega-merger's size and, examining key areas in detail, the question could be asked...would it really benefit many key stakeholders at all right now?
The businesses?
One of these companies is in rather better shape than the other at this point - which made takeover talk so pertinent.
Shell have been on a cost-cutting drive, are focused on core operations and have a clear strategy. As well as paying out dividends to shareholders, a share buyback scheme will have seen the business pour £2.5bn into itself recently, such is the value it currently sees in its own price weighed against future prospects.
Oil is a cyclical business, so ups and downs are expected, but the share price is up just over 4 per cent across 2025 so far and 95 per cent over the last five years.
For BP, those same numbers are 6.5 per cent down and 20 per cent up, respectively. The smaller business has had two major strategy shifts since Covid alone, pivoting first to and later away from renewables. One chief executive left in 2023 and current chairman Helge Lund is stepping down next year.
Most analysts agree they are a valid takeover target, but not an easy one to absorb - plus the buying fee would come at a premium to the current price, at least 30 per cent, probably more.
Since Shell have already said there's a high bar to any acquisitions and currently see more value in buying their own shares than buying other companies, it's not immediately apparent where a deal would be beneficial.
The one exemption which most investors and analysts agree on would be if an overseas rival attempted to buy BP, then Shell may need to move to ensure they're not left behind by other oil firms getting larger.
Otherwise, a much higher Shell price, a much slimmer BP or some other industry emergence would be needed as catalysts for a deal.
The employees?
BP employees more than 100,000 people worldwide, while Shell has a slightly lower number on its books. The latter said they expected to cut around a fifth of their workforce in 2024, across a period of more than a year. Considering BP earn less with more people, it's an indication of why things have been needing to change.
However, there will naturally be a lot of overlap across some roles and areas of the two businesses which, were they ever to merge, would result in job losses.
That would be a 'bad look for a government trying to revive economic growth', said Dan Coatsworth, an investment analyst at AJ Bell. Likewise, the government would face pressure if there was an overseas bidder looking to take control of BP.
Regulatory concerns
Such an enormous commercial deal would have additional complications beyond buying terms. Robert Salter, a tax and M&A expert at Blick Rothenberg, explained how one big difficulty would be getting past competition regulations.
The Competition and Markets Authority (CMA) would have concerns and, even if they approved the deal, the fact that so many nations are eventual end-users of the products means Brussels would likely also step in. The regulatory hurdles are so big it would be 'almost unforeseeable' to get approval, Mr Salter told The Independent, at least without stipulations such as needing to sell off perhaps retail arms or specific projects.
That probably means right now Shell would be better off buying projects or stakes from BP rather than the overall company - but why would BP accept that?
Meanwhile, regulatory bodies would also be pushed by suppliers to reject the deal, as they would lose out on one potential customer and may be squeezed to accept lesser terms to do any business at all.
The environmental impact would also be considered; with Shell set on full-steam-ahead gas and oil production, it's unlikely to be a big winner.
The stock market and shareholders?
As well as employee overlap, there will be shareholder overlap. Some may certainly appreciate a slimming down of the portfolio but there's more to it.
BP owners, for example, are split at present: some are displeased at moving away (but not entirely away) from renewables, while another group are annoyed the pivot isn't far enough away. The aforementioned premium for their shares to be bought might be key - but in turn Shell shareholders might not be so keen on paying out for a company functioning below its potential, rather than receiving those billions more directly.
When it comes to one business buying another similar one, a key question is of whether they can, together, be more profitable and invest better, or create better technology, than they can already do apart.
That uncertainty leans towards it being a risk on both firms' part.
As for the stock market itself, there are a couple of ways to look at it: keeping both companies listed in London would be a win, and so too would a £200bn-plus company on the list. But it would still mean one major business fewer, one fewer £50bn company in the FTSE 100 replaced by a smaller one - and there are only 13 of them right now.
The consumers?
No.
The likelihood of any deal resulting in lower energy bills or similar consumer-led benefit is fanciful in the extreme and impossible to predict in any case, so wouldn't form any meaningful part of a grand agenda.
Even if a bigger, single entity should enjoy cost benefits, it could take years for that to be the case and anyway, there are too many other huge players on the world energy scene. Opec, for example, could limit supply, while other global events have shown even in the last week they can impact on oil prices more readily than any single business. Changing oil prices can impact on domestic inflation, but expect no direct correlation from takeover to refuelling at the petrol station.
As the numbers would suggest, this is a tremendously tough deal to work out even before any intent to bid.
Right now, the clear beneficiaries are not easy to pick out - but these are companies well-versed in dealing with multi-year timeframes and the landscape could look a lot different further down the line.