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LONDON, Oct 26 (Reuters Breakingviews) – Back in June the boss of $220 billion UK oil major Shell, Wael Sawan, told investors mergers and acquisitions were not his priority. The decision of $430 billion Exxon Mobil and $295 billion Chevron to acquire $60 billion Pioneer Natural Resources and $53 billion Hess respectively ought to change the game. But even if Sawan, BP’s Murray Auchincloss or TotalEnergies’ Patrick Pouyanné wanted to join in, several factors would hold European majors back.
The most obvious one is valuation. Both Exxon and Chevron paid in shares, using their decently valued equity. Exxon is valued at 7.5 times its next 12-month cash flow, per LSEG data, compared to the 6.3 times its $57 billion target Pioneer fetched. By the same metric, Shell, $160 billion Total and $110 billion BP are valued at only 4.1 times, 4.3 times and 3.4 times, despite their shares rising 20%, 6% and 13% this year respectively. That cross-continental valuation gap means the Europeans would have to surrender a lot more of their companies if they attempted deals.
As big an issue is what they should buy. The Europeans’ ESG-focused investors have largely welcomed Shell and BP’s more gradual pivot from crude production. But it would remain a stretch for either to ape their U.S. peers and buy a big oil group.
The European majors could instead double down on investments that burnish their energy transition credentials. The uncertain path to net zero means lower-carbon biofuel outfits and zero-carbon wind groups are now cheaper. Finland’s $25 billion Neste , which has a strong focus on renewable diesel and jet fuel, has seen its share fall by over 30% in 2023. Denmark’s $20 billion offshore wind giant Orsted is a quarter of its early 2021 valuation.
Yet both look like non-starters. Neste still trades at double Shell’s valuation at 8 times next 12-month cash flow, while Orsted is at 7.3 times, more than double BP’s. Worse, Neste is 36% owned by the Finnish state and Denmark owns just over 50% of Orsted. It’s unlikely their political masters will sell out on the cheap.
There’s one wild card for the three Europeans that could tick all the boxes: a punt at $56 billion Occidental Petroleum. The U.S. oil producer is valued just above Shell at 4.7 times its next 12-month cash flow, and has gone into carbon capture in a big way, investing in technology that will remove not only the carbon dioxide emitted via its production but also when customers burn the oil. Still, its newfangled “Direct Air Capture” tech is untested, and a 30% premium would involve even Shell handing over 25% of the company. Warren Buffett’s 25% stake in Occidental means he would have to agree, too.
Oil giant Chevron said on Oct. 23 that it had agreed to acquire rival Hess for $53 billion in stock, the second-largest oil transaction this month following Exxon Mobil’s $60 billion bid for Pioneer Natural Resources. Hess investors will receive 1.025 shares of Chevron for each share held, worth $171 per share based on the closing price on Oct. 20.
Editing by George Hay and Streisand Neto
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