Why U.S. oil companies may be tempted to purchase European rivals on the cheap
By Steve Goldstein
Critical information for the U.S. trading day
There's been a pretty good run in the stock market, at least when the exchanges are functional. Nomura's Charlie McElligott explains that investors have had to "grab" assets due to repricing "right-tail" outcomes higher, as U.S. inflation is cooling, China's reopening and Europe is avoiding a deep recession.
How long that process plays out is a question, but the call of the day looks specifically at the oil sector. The European-listed integrated oil companies trade at a more than 40% discount to their U.S. peers, according to analysts at Citi. Most of that discount is explained by the higher premium U.S. stocks more generally possess to European equities, though Exxon Mobil's and Chevron's shale exposure, and the pressures on European investors not to own the sector for political reasons, also are a consideration.
The markets, say Citi analysts led by Alastair Syme, aren't going to close that gap by themselves. But the industry could, if Exxon (XOM) or Chevron (CVX) bought out BP (BP.LN), Shell (SHEL.LN) or TotalEnergies (TTE.FR), whose current market caps range between $100 billion and $200 billion.
"The prize for the U.S. IOCs would look considerable, with value uplift coming through the ability to fund at a lower [cost of equity] as well as cost-synergies that we estimate in [net present value] terms in the region of 15-30% of target market-cap," they say.
Would Europe allow the Americans to swoop in? "European politicians would undoubtedly rattle their sabres, but given they have already set out an anti-oil narrative it seems unlikely they would intervene directly. Competition authorities are unlikely to put up blockers, at least not enough to remove the value-accretion potential," they reply.
It's not like the oil industry hasn't gone through consolidation before, the last wave occurring in the 1990s. And in American hands, the European companies wouldn't spend as much on low-carbon investment, "a part of the business that is set to be a cash-sink for the European IOCs over the coming years."
The research note comes ahead of Chevron results, due Friday, and Exxon results, which are scheduled for Tuesday.
U.S. stock futures fell sharply with the Nasdaq 100 contract weighed down by Microsoft's cautious outlook. Oil futures were trading around $80 per barrel, and the yield on the 10-year Treasury was 3.42%.
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