A BP-Shell merger would create a truly global UK oil champion

Funny, how it takes a renowned shareholder activist like Elliott to focus minds. It is revealed the New York hedge fund has become the third-largest shareholder in BP after building a nearly 5 per cent stake at a cost of £3.8 billion, and is agitating for change, and the investment community goes into overdrive. Elliott has a track record in achieving its agenda, often conducting a protracted campaign of attrition, so the news must be taken seriously. Also, it’s the choice of target. BP is deliberate – Elliott is nothing if not calculating, running the sums backwards and forwards ad infinitum before striking. But BP has been staring everyone in the face for so long, there waiting to be attacked. Now someone has come along and finally done it. While Elliott has yet to publicly disclose its intentions, what has been the subject of speculation so far is a demand to cut back on renewables . History suggests this will be one of several, that Elliott does not do things by halves. Items high on the agenda could be exiting petrol service stations, selling Castrol lubricants and US shale oil and gas, and dropping EV charging points. On the list too could be a management overhaul, with a boardroom shake-up and chairman Helge Lund in the line of fire. Again, that could be just for starters. The fact is BP has a lengthy roll-call of issues. Its overall strategy is confusing: is it an oil firm that dabbles in eco or one that is wholly committed to non-fossil fuels? Discuss. The balance sheet is skewed and highly leveraged. The company’s market valuation at £74 billion lags behind its main rivals. One moment it’s all out for green. Then there’s a change in management. Not so eco. Wait. Oil production is to be reduced by 25 per cent by 2030. So not so fully oil and gas either, not like substantially bigger players such as Exxon Mobil. Arch-rival Shell, also worth a lot more, knows what it’s doing, undergoing an eco rethink and paring down debt. BP meanwhile can’t make up its mind, and despite lowering the bar on renewables has even increased its exposure to solar and biofuel joint ventures. Elliott’s timing is deliberate, making its move shortly before new chief executive Murray Auchincloss is due to announce a heavily trailed “fundamental reset” next week. Analysts were waiting for that one with weary resignation – there have been so many reviews from BP in recent years that the description has become risible. There has been, too, a revolving door at the top, with Bernard Looney’s hasty departure followed by the appointment of the chief financial officer, Auchincloss. The jury is out on that one as well, with critics wondering why, if Auchincloss is so good, he was not promoted in the first place. There is also doubt in some quarters about the suitability of a numbers expert to run a sprawling empire the size of BP. Poring over spreadsheets is one thing; motivating a vast workforce, not to mention an army of stakeholders, is another. The one consistent through an unedifying period in terms of sharpness and direction of travel is Lund. That’s why his head may be on the Elliott wishlist. Lund’s cause is not helped by his chairing of Denmark’s £274 billion Novo Nordisk, maker of the weight-loss medication Wegovy. Juggling two massively demanding and prestigious jobs is never a good look, no matter how much you make the case for being able to do them both, and only leaves you vulnerable. Investors are dissatisfied, to say the least. Their shares in BP are down 2 per cent year on year, whereas Shell is up 9 per cent. Still, Elliott is the one to fire the gun. Speculation is hardening on the notion that something much more “fundamental” than the one billed may be in order. While comparisons are made with Shell, the other UK oil major is not without its weaknesses. By common consent, chief executive Wael Sawan has done an excellent job since taking charge in January 2023. But Shell remains resolutely down the global valuation chart and carries an admired but underappreciated air – so much so that Sawan has spoken of moving the company’s primary listing to the US if there is no improvement. What this points to, and what Elliott may have started, is agitation for a Shell-BP merger. For those who like to fly the flag it would create a single British “champion”, with a combined staff of 180,000 and shared exploration interests in the Gulf of Mexico – sorry, the Gulf of America – and Iraq. Their trading arms could also be successfully combined into one. More importantly, it would form an oil corporation of sufficient scale to compete on the world stage. Aramco has a market capitalisation of £1.4 trillion, Exxon Mobil is next on £378 billion. Then would come the new Shell-BP, at £237 billion, putting it above Chevron’s £222 billion and PetroChina at £159 billion. It would be a heavyweight global player, in other words, which at present Shell, and most definitely BP, are not. The great practical benefit would be in borrowing costs. That muscle would enable the UK behemoth to borrow cheaply, certainly at lower rates than those charged to Shell and BP currently. Extracting oil is an expensive activity that requires plenty of capital. Shell-BP would be playing on a more level playing field, still behind Aramco and Exxon Mobil but up there. Investment bankers are excited at the prospect – possibly the fees to be made from engineering the complex marriage are also playing a part. Doubtless, there would be sadness at the disappearance of a company which, when all's said and done, remains a historic great British entity, a household name that requires no introduction anywhere. But needs must, this is what globalisation does, and right now BP and to a much lesser extent Shell, are looking internationally lightweight. Who knows, a union might not be in the tight-lipped Elliott’s plans, but the desired transformation may ultimately prove more wholesale than anything even it envisaged.