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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
European oil and gas bankers may well be gnashing their teeth. While their US counterparts are clocking up fees from a giant wave of consolidation — of which ConocoPhillips’s $22.5bn acquisition of Marathon Oil is but the latest example — they have been left cooling their heels. Where, might one ask, are the European oil and gas megadeals?
It is, of course, much harder for European majors to play the M&A game. For one thing, a lot of the frenzy in the US has been about consolidating acreage in the Permian Basin, a maturing onshore region which offers a healthy opportunity to cut costs. That’s the rationale behind Exxon’s acquisition of Pioneer, Diamondback’s purchase of Endeavour, and Conoco’s swoop on Marathon.
No such consolidation play exists for European majors. Domestic oil basins have already gone through this cycle. The top three operators in Norway now controlling 60 per cent of production, according to Chris Wheaton at Stifel, for example. The UK North Sea remains more fragmented, but has still undergone considerable consolidation since 2014.
What’s more, European majors have a global footprint, without a common area of concentration like the Permian. Even crunching together — say — Shell and BP would not yield very big geographic overlap. One way around this is to pool assets in specific producing countries, as Eni and BP have done in Angola.
Not all US megadeals are predicated on rationalisation, though. The prize, in Chevron’s arduous battle for Hess, is its stake in the huge, low-cost Stabroek Block offshore of Guyana. Might not European majors — facing slower growth and often shrinking reserve lives — be attracted by such a strategy?
Here, too, they face hurdles. Mid-sized operators in Europe with an attractive resource portfolio are few and far between. It would also be hard for lowly rated European majors to issue stock to fund such purchases.
Smaller upstream companies, trading at sizeable discounts to net asset value, might be a more digestible option, but European majors have struggled to find investor support for a strategy that extends the lives of their hydrocarbon businesses. Indeed, BP still has a target to reduce its production between 2019 and 2030.
The dearth of oil deals puts European majors at a strategic disadvantage compared with their US peers. It is hard to see how they can reverse out of this cycle of slower growth, lower returns and low valuation stock prices unless their bets on low-carbon energies start to pay off. Perhaps they should double down on those instead.