6/30/2025
Opinion: Shell is Right to be Wary. Gobbling up BP Will Lead to Indigestion
The Times (London) (06/30/25) Yeomans, Jon
"Wael Sawan must feel like he’s going blue in the face," writes Jon Yeomans, business editor at The Times. "How many times, the boss of Shell (SHEL) asks himself, can he say the same thing over and over?" Last week, Shell resorted to a stock market announcement to insist “it has not been actively considering making an offer for BP Plc (BP)," that it has not made an approach, and that “no talks have taken place with BP.” However, even that has not stopped the chatter swirling. "At its heart," says Yeomans, "this is a debate about whether one of Britain's biggest companies should buy another of Britain's biggest companies — and what it means for the UK, and the stock market, should it happen." BP and Shell make for contrasting case studies. At the start of this decade, both poured money into renewable energy and slightly disavowed the stuff that makes them money: oil and gas. For their pains, both attracted unhappy activist investors. Sawan, appointed in 2023, moved quickly to wheel Shell back around to what it does best — fossil fuels — and mollified Third Point, the activist thorn in his side. He has been keeping his investors broadly happy ever since, paying dividends and buying back shares. The company's market capitalization is now £152 billion. BP has been a sorrier saga. Former boss Bernard Looney, the architect of its green strategy, was ousted over matters relating to his tendency to, er, date the staff. His successor, former financial boss Murray Auchincloss, took over in late 2023 and has attempted a “reset” of the strategy, rowing back from Looney's greener tilt. It hasn't quite wowed the stock market (market cap now: just under £60 billion). Activist investor Elliott Management popped up earlier this year to scare BP straight. So far, it has encouraged chair Helge Lund to cash in his chips, and wants BP to go faster in cutting costs, noting that its headcount is less productive than Shell's. The activist is thought to believe BP can still stand on its own two feet. Much will hinge on Lund's replacement, who will be chosen by a committee led by Aviva chief executive Dame Amanda Blanc (as if she wasn't busy enough overseeing the insurer's takeover of Direct Line). As senior independent director at BP, it's her job to find a chair who can steady the ship and then, most observers suspect, find a new chief executive. BP insiders insist the company is already getting a grip on its operations, putting bits up for sale and ramping up the cost-savings. The hunt for a new chair is being stepped up, with a view to completing the process this year, rather than it dragging on into 2026. "It can't happen soon enough," says Yeomans. "BP is vulnerable to a takeover, if not by Shell, then someone else. Last week brought the unedifying sight of candidates for the chair's job seemingly ruling themselves out via the press." There are certainly prizes to be won in carving up BP's assets and slimming down its cost base. A merger could create a European oil and gas heavyweight to take on the U.S. giants. A combined BP/Shell would have a range of complementary oil wells across the globe. Potential cost-savings would run to $5 billion (£3.5 billion) or more, analysts reckon. The downside, however, is that, while comparatively cheap, BP may not be quite cheap enough. A figure of $80 billion has been mooted to buy BP, but Shell would also have to absorb BP's debt — the biggest, relatively speaking, in the sector. And its “downstream” arm — the bit with the refineries and petrol stations — is likely to attract scrutiny from competition watchdogs. A combined company would be a dominant player in liquefied natural gas, which could cause further competition issues, particularly in China. Perhaps most unnerving of all, for management and investors, would be the hit to BP and Shell's trading desks. These are hugely profitable, and not terribly transparent, divisions. Lumping them together might be a case of “one plus one adding up to less than two,” as BNP Paribas analysts put it. You don't want to kill the golden goose. "In short, a merger would be messy," Yeomans concludes. "And that's before we consider the job cuts that could result as Shell's 96,000 staff collide with BP's 100,000. That's less of a concern for hard-nosed City advisers with pound signs in their eyes, but probably of passing interest to government ministers and nervous staff." There is another wrinkle to this deal that may give the City pause: concentration risk. Under Financial Conduct Authority rules, investment funds are not allowed to have more than 10% of their holdings in one company. Shell and BP's combined weighting in the FTSE 100, at current levels, would be above 11%. That poses an unusual quandary for those funds that try to match the FTSE 100, potentially forcing them to sell down their Shell/BP holding. Of course, this problem would be solved if Shell opted to switch its listing to New York, as Sawan has pondered. Of course, everything has its price. Should the oil price weaken further, Middle Eastern tensions ebb and BP fail to stem its slide, Shell may come knocking. "For now, though," according to Yeomans, "Sawan might be best advised to keep saying — once more with feeling — “I'm not buying BP."
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