Potential Oil Industry Mega-Mergers Coming?
The last few months have been busy with regards to mergers and acquisitions. From Salesforce’s acquisition of Slack, to AMD’s acquisition of Xilinx, the tech industry has been kept quite busy. This has sparked some optimism within the market, with observers speculating that some oil industry giants could be considering a merger at some point in the future. Such a move would certainly help improve business given the challenging environment the oil industry finds itself in.
The oil industry saw the worst of COVID-19 with demand for oil having plunged to historically low levels, a direct consequence of life coming to a standstill due to worldwide lockdowns. Lack of demand is expected to continue as large parts of Europe and the USA remain under full or partial lockdown. Increasing focus on green energy has further exacerbated the oil industry’s problems. Companies like Chevron, Exxon, Shell, and BP have lost over $50 billion altogether over the last year. Given that, it is nearly impossible for oil companies to funnel their resources to green energy research.
The Wall Street Journal reported last week that Chevron and Exxon had considered a merger early last year when the virus first hit. A merger between these two companies would easily be the largest ever. That distinction is currently held by Vodafone with its $181bn purchase of Mannesmann AG in 2000. Given Exxon and Chevron’s combined market capitalization of nearly $400bn, a new record would be set with this merger. . As of now, all talks have been suspended. That said, legal documents were drafted during the discussions, giving strength to the speculation.
A merger of this size will attract added scrutiny from US regulators who would want to review it for anti-trust issues. That review alone takes months to complete. Added to that, the democrats have been historically less supportive of such mergers. And with President Biden’s move towards green energy, the oil sector is unlikely to get many favors.
Will a Merger Help?
Generally speaking, mergers occur to create synergies, reduce costs and competition, and ultimately improve businesses’ bottom line. So in this regard, the oil industry could benefit from any merger activity, especially if it doesn’t want to be left behind in the race to green energy.
Industry observers have pointed out that the time for a merger was last year when oil prices were hovering around the $20 range. As of today, the price of oil has already tripled, making it even more challenging for companies to come together.