Blood in the water
Mergers offer a chance to cut costs and save money. Prices are low. BP, now fit, lean and cheap, is not best placed to go shopping itself. So it could be on someone else’s list.
The oil giant’s troubles could make it a takeover target, especially if the price of crude keeps falling
INVESTORS in BP are a patient bunch, and well rewarded for it. Britain’s third-largest company pays generous and reliable dividends, making it a mainstay of many private and institutional portfolios. But in the run-up to the oil giant’s quarterly results on February 3rd, some investors are jittery. Although BP’s dividend yield is a juicy 5.8%, its shares have fallen by a fifth over 10 years, greatly underperforming the broader market (see chart) and making total shareholder returns slightly negative. This is mainly because of the Deepwater Horizon disaster in the Gulf of Mexico in April 2010, which cost 11 lives and a stonking $43 billion (and maybe more) in fines, legal bills, compensation and clean-up.
BP has slimmed since then. It has sold more than $40 billion of assets, cutting its size by a third, as it continues to fight (and mainly lose) lawsuits and appeals. Now cheap oil is adding a new edge to its woes. Until recently BP made plans based on an oil price of $100 a barrel. When it announced its latest $1 billion restructuring plan in December, it tried to reassure investors that its investment plans assumed an oil price of $80, but with a fallback level of $60. The price was $65 then. Now it is below $50. As we went to press on January 15th BP was announcing further job cuts.
Not only does existing capital spending (an annual $24 billion-plus) look unaffordable, but those generous dividends—the top priority—will gobble cash. An institutional shareholder wonders if BP may resort to paying next month’s dividend in new shares (or “scrip”). “They are being overwhelmed by events,” he says.
So the chances have grown that one of BP’s rivals will seek to capitalise on its weakness and bid for it. Although its value has fallen sharply, its market capitalisation is still $107 billion, so the list of possible buyers is short. The most talked-about potential suitors are Exxon Mobil (market value $380 billion) and Shell ($197 billion), with Chevron ($196 billion) as a possible “white knight” merger partner to fend off the other two. There are some state oil and gas firms big enough to afford BP (the Saudi, Qatari or Kuwaiti ones, say), but none seems to be in shopping mood just now.
All the firms involved decline to comment. But it is easy to see some advantages to a takeover by Exxon. The two companies fit, in that Exxon’s American business is smaller than its international operations. And BP, though nominally British, is strongest in America. Exxon has lots of cash and low borrowing costs. It did a good job of absorbing Mobil, another rival, in 1999. Moreover, the biggest blight on the BP share price is its American lawsuits. It has handled these badly. Exxon, with its unrivalled political clout, might do better.
Another attraction is BP’s nearly 20% stake in Rosneft, Russia’s biggest and best-connected oil company. Rosneft is in trouble: heavily indebted, cut off from Western capital markets by sanctions, and bailed out by the Russian state in December. But for a far-sighted outsider, Russia’s oil and gas reserves are hard to ignore. BP has made a lot of money there so far. Sanctions forced Exxon, which has deep ties with Russia, to cancel its Arctic drilling project with Rosneft. Buying BP could offer a way back in. It would take a brave boss to do this; but Exxon’s Rex Tillerson is made of stern stuff.
Perhaps the strongest reason for a takeover is not BP’s plight, but the oil industry’s general gloom. The S&P Global Oil index has performed only marginally worse than BP over the past 10 years—it is up just 2.6%. All the big energy companies were wrestling with rising costs and falling reserves even before the oil-price fall. Now they are grappling with its consequences. Mergers offer a chance to cut costs and save money. Prices are low. BP, now fit, lean and cheap, is not best placed to go shopping itself. So it could be on someone else’s list.
BP wants to stay independent. Its bosses believe they have done well since 2010, ending an era of bloat, excessive ambition and corner-cutting on safety. Any buyer would have to surmount some big obstacles. Britain’s former imperial oil company has close ties to the establishment. A sale to an American buyer would mean a political row, in an election year.
It is also uncertain that Exxon would be able to solve BP’s remaining American lawsuits. The biggest headaches are in Louisiana, a state where outsiders tend to fare poorly, whether they are foreigners or just from out of state. Many legal wheels have turned since Barack Obama ostentatiously referred to BP as “British Petroleum” in what some saw as opening the hunting season on the company. One would have to believe that the American legal system was open to influence from politics and money to think that switching ownership would help. Some might say it is, but Exxon would hesitate to argue that case publicly. Boards are usually nervous about buying a company embroiled in lawsuits.
You can’t be sure of Shell
Nor does the idea of Shell taking over its old partner and rival look quite so attractive when examined in detail. BP’s former chief executive, Lord (then John) Browne, did once consider a merger, at a time when his company was top dog. Shell is now the stronger party. It has a solid balance-sheet, and there are some attractive synergies and cost savings to be had.
But big, hostile bids are not the Anglo-Dutch company’s style. It has a lot on its plate. Its big bets on gas and Alaskan drilling are not going well. Whereas BP sold assets when oil prices were high, Shell is now scrambling to do the same at a time when takers are few. This week it had to scrap a huge petrochemicals project in Qatar.
Melding together the two firms’ cultures might be no easier than if Exxon were the buyer. BP has never quite shed its imperial ways, including a climate in which employees feel nervous about bringing the boss bad news. Shell is an engineering-driven company, which sees itself as flatter and more collaborative. Anti-monopoly worries would require complicated and risky untangling of downstream assets—and in hard times.
The risks and costs of trying to buy BP, and then absorbing it, may be enough to make potential predators think twice about having a go right now. And there are plenty of other oil firms they could buy, that would not come with BP’s baggage. But if the oil price stays low, or if BP’s condition worsens for other reasons, all bets are off. The company has changed a lot in the past decade. To guarantee its independence it will have to do even more now.
Shell fined nearly $1 million for falsely selling green motor fuel
SHELL FOUND TO HAVE MISLABELLED ULTRA-LOW SULFUR DIESEL
From ClickGreen staff. Published Tuesday 20 Jan 2015 under the headline:
Shell slapped with near-$1 million fine for falsely selling green motor fuel
The U.S. Environmental Protection Agency (EPA) has announced a settlement with three companies affiliated with Shell Oil Company to resolve Clean Air Act violations, including selling gasoline and diesel fuel that did not conform to federal standards.
The violations resulted in excess emissions of harmful air pollutants from motor vehicles, which pose public health threats and environmental impacts. The companieswill pay a $900,000 penalty to resolve these violations.
“Fuel standards established under the Clean Air Act play a major role in controlling harmful air pollution from vehicles and engines,” said Cynthia Giles, assistant administrator for EPA’s Office of Enforcement and Compliance Assurance.
“If unchecked, these pollutants can seriously impair the air we breathe, especially during summer months when they can reach higher levels. This settlement makes clear that if companies fail to produce fuels that comply with federal standards, they will be held accountable.”
Actions by three companies affiliated with Shell Oil Company—Deer Park Refining Limited Partnership, Motiva Enterprises LLC, and Equilon Enterprises LLC, which does business as Shell Oil Products US—are alleged to have resulted in violations of the provisions of the Clean Air Act that ensure the production, testing and sale of high-quality vehicle and engine fuels in the United States. Specifically, EPA alleged that:
• Shell sold mislabeled diesel fuel—fuel labeled ultra-low sulfur diesel that was actually low sulfur fuel—at two gas stations in Northern Virginia. EPA inspectors discovered the violations at the stations, one of which came after receiving a complaint from a consumer. Low sulfur diesel fuel contains up to 500 parts per million of sulfur; ultra-low sulfur diesel may not exceed 15 parts per million of sulfur.
• Shell sold over 4.2 million gallons of gasoline that exceeded a fuel standard for volatility, known as the Reid Vapor Pressure level, that helps control ground level ozone during summer months. Gasoline with higher volatility results in increased emissions of volatile organic compounds, which contribute to the formation of ground level ozone. Breathing ozone can trigger a variety of health problems, particularly for children, the elderly and people who have lung diseases such as asthma.
• Shell distributed about 700,000 gallons of gasoline from its Sewaren, New Jersey terminal that contained elevated levels of ethanol. Excess ethanol in gasoline can harm emission control components on some vehicles and engines. The Reformulated Gasoline Survey Association, an organization that works to improve industry compliance with Clean Air Act fuel standards, identified the fuel with excess ethanol after surveying Shell retail stations in Irvington, N.J. and Staten Island, N.Y., and notified EPA.
• Shell failed to follow various protocols for sampling, testing, reporting and recordkeeping requirements that help ensure compliance of its fuel with federal standards. Shell proactively reported some of these violations to EPA. Recordkeeping, reporting, sampling and testing violations reduce EPA’s ability to know whether fuels meet certain standards and can lead to increased vehicle emissions.
RELATED
In a settlement with the Environmental Protection Agency, three Shell Oil Co. affiliates will pay $900,000 for violating the vehicle fuel standards.
Shell companies violate Clean Air Act: Joplin Independent
The companies will pay a $900,000 penalty to resolve these violations.
Exxon Mobil, Royal Dutch Shell, and Petrobras In Trouble?
By: MICHEAL KAUFMAN: Published: Jan 20, 2015
James Chanos is a renowned short-seller, hedge fund manager, and the founder of Kynikos Associates – an investment firm which specializes in short-selling. In an interview with CNBC last Friday, Mr. Chanos cited serious problems for some of the largest oil producers, leading him to short some major oil companies for a couple of years, including Exxon Mobil Corporation (NYSE:XOM), Royal Dutch Shell plc (ADR) (NYSE:RDS.A), and Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR).
Mr. Chanos believes that the US shale revolution was uneconomic from the very beginning and major drillers continue to lose as weaknesses in shale economics are exposed. The US will become the biggest oil producer in 2015 and the increase in supply would be large enough to disrupt the entire market, including the Big Oil firms. “Days of findingcheap oil are over,” he added.
Due to the lack of cheap and conventional oil sources, companies have been trying to explore oil which is difficult and expensive to drill. Major oil exploration and production companies will find their business models “challenged” and would have to take up exploration activities to the Arctic or set up drilling rigs in the middle of an ocean. The current oil price level is not high enough to adequately support such capital intensive crude oil exploration.
He noted concerns over billion-dollar long-term projects of oil producers despite the availability of cheap energy in North America. The increasing production will only serve to extend the demand-supply gap, further compounding the misery of oil producers. Moreover, these projects are highly leveraged. They rely on debt, which adds a new dimension of riskfor oil companies. Unprofitable investment projects, excessive supply, and a ton of debt is a “witch’s brew” according to Mr. Chanos.
Another interesting point from his interview was that Mr. Chanos would have maintained his negative view on the big oil companies even if crude oil price ranged from $80-90 per barrel. His negative viewpoint stems from his belief that the business models of large-scale oil producers are struggling. It implies that major oil producers might be in trouble even if crude oil price rebounds.
When questioned whether oil companies would bust, Mr. Chanos refused to give out a general verdict which would be applicable across the energy sector but focused on looking at each company individually as they have differing balance sheets, cash flow statements, and income statements. He did, however, point out that major national firms, like Petrobras, are more likely to be “problematic”.
Stocks of Exxon Mobil and Shell have tumbled 8.11% and 10.08%, respectively, over the last year, while Petrobras shares have crashed 43% as it fights a major corruption scandal.
Conventional wisdom will make it seem like Exxon Mobil and Shell are better positioned than smaller energy firms to withstand the volatility in oil price. However, for a man who has made his fortune short-selling major stocks, Mr. Chanos, said something might be wrong here.
Goodfellow or Badfellow?
By John Donovan
There have been a number of posts on our Shell Blog by insiders welcoming the apparent departure of Paul Goodfellow, Vice President US Unconventionals for Upstream Americas.
e.g.
POSTING BY “F-150″
So, Christmas has finally arrived in The States with the announcement that Goodfellow is finally leaving. After seeing the havoc he has inflicted in Deepwater and Unconventionals it will be good for folks like Crouching Tiger to see the damage non-Americans can do to shareholder value. Remember Walter, Phil and David Greer?
A more recent posting suggests he has been promoted?
So I am not absolutely sure if he has fracked off or not?
I did check his Linkedin page when the first Shell Blog posting was made and note that since then, his CV seems to have suddenly shrunk to a bare minimum.
To ensure his contribution to Shell is never forgotten, I have posted some detailed information about his time at the company:
Paul Goodfellow, Ph.D.
Vice President US Unconventionals, Shell Upstream Americas
Paul joined Shell in Holland in 1991 after receiving a B.Eng. in Mining Engineering and a Ph.D. in Rock Mechanics. He worked in the mining industry in South Africa and Finland prior to joining Shell. He has worked in a variety of Wells related roles throughout the Group. In 2000, Paul was assigned to Shell Exploration & Production Company (SEPCO) as the Operations Manager for Deepwater Drilling and Completions and in August of 2003 he took up the role of Wells Manager for the Americas Region. He was named Venture Manager for North America Onshore in July 2008, in September 2009 he moved into the role of Vice President Development, Onshore for Upstream Americas responsible for field development planning, capital investment and technical and technology functions. In January 2013 Paul was appointed to his current role as Vice President US Unconventionals for Upstream Americas. Paul is a Chartered Engineer and a member of the Institute of Mining and Metallurgy and SPE. He is married with three children.
UPDATE 20 JAN 2015
: John, In response to your article… Word in the halls of Woodcreek is that Goodfellow was promoted a year ago when the Unconventional business was downsizing. By the way, that picture of him looks downsized by about 100 pounds.
RELATED ENERGY VOICE ARTICLE, WHICH ANSWERS ONE QUESTION. Article was published today and the sentence about Goodfellow seems to have been poked into the middle of a planned press release about Glen Cayley. Looks out of place and possibly prompted by this article.
Shell VP moves to new role
The vice president for oil giant Shell’s Upstream business in Europe is set to move onto a new role within the company.
Glen Cayley has been in his current position since September 2010.
Mr Cayley first joined the company in 2006 as vice president of global exploration and was responsible for appraisal and resource maturation.
Shell said he will move to a special projects role within Shell’s upstream business.
A spokeswoman said: “Shell can confirm that Paul Goodfellow will take over the role of Vice President UK and Ireland on March 1 2015.”
Last year Mr Cayley became vice chairman of industry body Oil & Gas UK
Glen Cayley, upstream director at Shell UK has become vice chairman of the industry body, representing the operator community.
Prior to more than eight years with Shell, he has an additional 25 years’ experience from his previous roles at ExxonMobil.
The TRUTH will set you FREE.
Introduction by John Donovan
From an article by Georgi Kantchev published by the Wall Street Journal 19 Jan 2015 unde the headline:
