Exxon, BP in Deal Spotlight After Shell Buys BG Group

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Now that Royal Dutch Shell Plc has made its move for BG Group Plc, Exxon Mobil Corp. and BP Plc could contemplate deals -- perhaps even with each other.

Speculation of an Exxon-BP combination surfaced last year after oil prices declined sharply, increasing the appeal of big mergers that could yield massive cost savings. BP has largely put behind it the legal morass surrounding the 2010 Gulf of Mexico spill. Still, the $124 billion company remains among the cheapest major producers relative to estimated profit, according to data compiled by Bloomberg.

There are, of course, other targets for Exxon and BP that have gotten less expensive in recent months. Anadarko Petroleum Corp., Cabot Oil & Gas Corp., Pioneer Natural Resources Co., Occidental Petroleum Corp. and Tullow Oil Plc are among those that have risen to the top of analysts’ lists. Their market values span Tullow’s $4.2 billion to Occidental’s $59 billion. Exxon is valued at $353 billion.

The oil slump of the late 1990s sparked a merger boom. BP was the one that kicked things off when it announced plans to buy Amoco Corp. Exxon and Chevron Corp. also struck deals at the time. Should prices remain depressed, history could repeat itself.

Chess Moves

“There’s the potential for a lower-for-longer scenario when it comes to oil prices, which suggests that the majors should at least be considering the playbook they used at the turn of the last century,” said Eric Gordon, a Baltimore-based energy analyst for Brown Advisory, which manages $52 billion. “You really have to spend time thinking about not just the next chess move, but two and three moves out.”

BP may be more likely to go on a shopping spree than sell itself because its portfolio is lacking, said Aneek Haq, a London-based analyst at Exane BNP Paribas. In addition to U.S. shale targets, Galp Energia SGPS SA may draw interest from buyers because, like BG, it offers access to oil assets in Brazil, he said. Lisbon-based Galp has a market value of about $10 billion.

For the other oil majors, Shell’s takeover of BG “increases the pressure on them to look at doing an acquisition,” Haq said in a phone interview. “It will probably just mean that they are going to be quicker and looking at stuff a lot more closely than they were previously.”

Oil Prices

Potential targets will probably ask for bids based on a higher price of oil, which could make it harder to get deals done at valuations that are still attractive to buyers, Gordon of Brown Advisory said. Brent crude dropped to as low as $45.19 a barrel in January, compared with a price of more than $115 last June. Shell said its deal is predicated on oil reaching $75 a barrel in 2017 and then $90 through 2020.

Among the top oil producers, Exxon is the most likely to strike a large deal, Paul Sankey, an analyst at Wolfe Research, wrote in a report Wednesday. In addition to Occidental and Pioneer, he highlighted Concho Resources Inc. and Continental Resources Inc. as targets that may entice the company.

“Is Exxon going to see these guys as nipping at their heels and look to do an acquisition?” said Chris Pultz, a money manager at Kellner Capital, an event-driven investment firm in New York. “With the large E&P deals, these guys have had a pretty good success rate of calling the bottom in oil. This could be an interesting opening salvo.”

Spokesmen for Chevron, Anadarko and Tullow declined to comment, as did representatives for Exxon, Pioneer and Continental. Representatives for the other companies didn’t respond to requests for comment.

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