Streetwise Professor

July 12, 2010

What Do You Get When You Cross a BP with an XOM?

Filed under: Economics,Energy — The Professor @ 9:34 pm

A very strange thing indeed.

There are rumors that ExxonMobil is considering a takeover of BP.  I have no firm opinion on the likelihood of such a combination.  But it would be a challenge to combine these two behemoths, for more than the usual reasons.  In particular, Exxon is not trading oriented, but BP is.  BP has an extensive and highly profitable trading operation, Exxon does not.  Indeed, recent experience (the trading joint venture with Duke Energy) probably did a lot to confirm Exxon’s belief that trading is far more trouble than it’s worth.

So what would happen, in the event of a merger?  Would Exxon spin off the BP trading operation?  But who would buy, since so much of the trading operation derives its profitability from trading around physical assets?  Would Exxon just shut down, or cut back, BP’s trading?  But given that  a non-trivial portion of BP’s profits come from trading, if it were to do that the price that XOM would be willing to pay might be considerably less attractive to BP.

All things considered, it seems like a most unnatural combination.

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  1. Ask Joel Greenplatt what he thinks about the spin-off possibilities.

    Comment by michael webster — July 12, 2010 @ 9:42 pm

  2. Oil majors have been merging for a decade now. It’s a natural and logical response to growing resource nationalism and peaking oil production, IMO – bigger buffers against price swings, improve economies of scale to be better able to handle complex projects / political influence, etc. BP is now weak, so XOM takes it over at bargain prices while BP’s shareholders walk away with a lot of money.

    Comment by Sublime Oblivion — July 13, 2010 @ 12:10 am

  3. Actually, the oil majors stopped merging a decade ago. Mobil merged with Exxon in 1999, Amoco with BP in 1998, Texaco with Chevron in 2001 and Elf with Total in 2000. Everything since then has been small-scale mergers aimed at a company gaining a foothold in a certain country or on a certain project. The majors are already large enough to handle complex projects (given that they have completed enough of them) and rather than seek mergers they prefer to adopt partnerships with other majors or minors on the mega-projects (see Kashagan Phase II for example, which has ENI, Shell, Total, ExxonMobil and ConocoPhillips as partners). There are no economies of scale to be had by any of the majors becoming much bigger: indeed, the worry has been that they have got too big to manage (hence the huge reorganisations which occurred in ExxonMobil and BP, and is underway in Shell as we speak).

    And, having worked for 3 majors, I’ve yet to see evidence of any action by a major oil company being made because of “peak oil”. Resource nationalism is an issue, but there is no evidence that majors are planning to merge – or even support each other – in response to a country flexing its muscles and squeezing and oil company. Indeed, an interesting case study is the different responses of ExxonMobil, Shell, and BP when they found themselves squeezed by nationalistic politics in Russia. Far from uniting in the face of a common enemy, each seems to take their own approach.

    Comment by Tim Newman — July 13, 2010 @ 2:24 am

  4. Banks who want to get into physical trading as an excuse to continue trading (in the light of Volcker proposals) might be interested. Other physical trading players, for instance Vitol might buy BP trading operations.

    Comment by Surya — July 13, 2010 @ 9:24 am

  5. As SWP says, BP trades around its asset position, so a spun-off trading outfit with no assets wouldn’t work. It would be a tail with no dog to wag.

    It is also noticeable that nowhere in its annual reports does BP split out or disclose any profits for its trading activities. It’s all subsumed within upstream, downstream, and marketing.

    ExxonMobil’s stance remains perverse. If you are not present and visible in the traded markets, then you are not making your view of the price known, and therefore you are a mere price taker from those who do. Hence XOM is a price-taker from people like Vitol, Masefield, Arcadia and Gekol because their views are heard and factored into price discovery, whereas Exxon’s are not.

    It is hard to avoid the feeling that Exxon can only get away with this because they are so huge, they can afford to be stupid.

    Comment by Martin — July 13, 2010 @ 10:40 am

  6. Why would you want to make your views known about prices? Make the other guys reveal their private information and make superior real investment decisions using the informational advantages of your large size (and ideally also any technical or operational superiority).

    Comment by srp — July 13, 2010 @ 8:28 pm

  7. If you’re XOM and you think jet fuel is worth gasoil plus $40 today, whilst those who do trade the market think it’s worth $60 (because they’re all sellers and want a higher price), then it’s clearly advantageous to announce that you’re a bidder at $40. It may encourage other bidders to come out at similar levels and it may induce the $60 offers to move towards you.

    The result of doing so may be a Platts, Argus etc assessment considerably lower than $60, which you then use to price your trades. Without your lower bid, the Platts assessment is going to be $60 or close to it.

    XOM are unquestionably very astute stewards of capital, but it’s hard to find anything else nice to say about them. By all accounts it is not a nice place to work either…

    Comment by Martin — July 14, 2010 @ 12:58 am

  8. XOM are unquestionably very astute stewards of capital, but it’s hard to find anything else nice to say about them. By all accounts it is not a nice place to work either…

    I’d have to disagree with that. I’ve worked within an Exxon organisation and they are streets ahead of Shell in terms of how they manage projects and make decisions. I also worked under them as a service provider, and they are very firm but very fair, and to be honest they’re probably one of the best companies to be subcontracted under. Firstly, if you do the job you will get paid (something which cannot be taken for granted with far too many companies), and secondly they will approve your work and pay you fairly promptly (Shell takes months to do either, in my experience).

    As for what it’s like to work for them, I know few Exxon employees who are unhappy. One mate of mine has been with them doing IT for 12 years, and despite him easily being able to get more money elsewhere, he likes Exxon because they pay him what they say they’re gonna pay him, do what they say they’re gonna do, offer genuine job security, and don’t mess him about.

    If people can’t find much nice to say about Exxon, I’d hazard a guess they’ve not worked under the umbrella of many other oil companies. Perhaps they’re different in the US, but abroad they are one of the best.

    Comment by Tim Newman — July 14, 2010 @ 6:22 am

  9. @Tim Newman,

    Thanks for the merger details.

    Comment by Sublime Oblivion — July 14, 2010 @ 1:29 pm

  10. I even remember Exxon’s last popular jingle:

    Here at Exxon
    People work and people play
    Here at Exxon
    At the start of every day
    Exxon’s dedicated to
    Finding energy for yoooou….
    Energy–for a strong America.

    You don’t get that kind of high-quality kitsch these days!

    Comment by srp — July 15, 2010 @ 5:14 pm

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