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Senior Sources See Merit In Shell BP Mega Merger

Screen Shot 2014-10-28 at 12.29.57“…the tumbling commodities price has meant that takeover chatter has spread to even the fantasy realms of BP and Shell. Once considered unthinkable, senior sources are now saying that there is merit in doing the colossal deal…”; “Companies will not be able to continue with business as usual and must either cut back on expensive exploration plans or cut their dividends, or both…” 

Major article by Ashley Armstrong published on page 5 of The Sunday Telegraph Business Section on 28 December 2014 under the headline:

“PIECES ON THE BOARD”

Extracts

One huge driver of dealmaking next year is expected to be the slump in commodity prices and with mining and natural resources companies accounting for 20pc of all London-listed companies a wave of merger mania can be expected in the City.

Oil prices that have slumped by 40pc since June to around $60 a barrel mean that “some resource companies are now uneconomical at best and at worse have unfeasible business models,” one dealmaker said.

“Companies will not be able to continue with business as usual and must either cut back on expensive exploration plans or cut their dividends, or both,” said Neil Passmore, chief executive at Hannam & Partners.

“This will have a huge knock-on effect for smallerplayers and dealmaking as a well of private equity cash is ready to target such projects, he added.

Global private equity firms have around $1 trillion of dry powder in their war chests and funds such as Blackstone, Warburg Pincus, KKR, Carlyle, Riverstone and Apollo, which have billion dollar Investments for natural resources, are already au fait with commodity markets.

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Smaller London-listed explorers such us Tullow Oil, BG Group. Dragon Oil and Ophir Energy are expected to be on the shopping list. However, the tumbling commodities price has meant that takeover chatter has spread to even the fantasy realms of BP and Shell.

Once considered unthinkable, senior sources are now saying that there is merit in doing the colossal deal and there could be echoes of the merger boom in 2000, which saw Exxon tie-up with Mobil and Chevron pair up with Texaco.

“These blockbuster, transformative deals either come at the dizzying heights of confidence or in the doldrums and with the oil slide are getting to the latter,” one banker said.

However, the high costs associated with exploration and production companies mean that they need cash to generate returns. So while all-stock mergers could be an option to bulk up two suffering companies – in the same manner as two drunks propping each other up at the bar – a share-for-share deal might not solve the problem.

Furthermore, for any deal to happen in the natural resources sector dealmakers and corporates will need to be confident that prices have steadied, even if they are at the bottom.

FULL ARTICLE

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