A potential super energy giant to rival Exxon Mobil Corporation is expected to emerge! Shell (SHEL.US) and BP p.l.c. Sponsored ADR (BP.US) are in talks for an epic merger.

It is understood that if the European energy giant Shell (SHEL.US) acquires another European energy giant, BP p.l.c. Sponsored ADR (BP.US), it will become one of the largest deals in European history, creating a European oil giant capable of challenging global industry leaders Exxon Mobil Corporation (XOM.US) and Chevron Corporation (CVX.US). The combined upstream oil and gas production of the super oil and gas giant would reach nearly 5 million barrels of oil equivalent per day, potentially surpassing the above two oil industry leaders by a large margin. Although BP p.l.c. Sponsored ADR is currently in a less than ideal situation - its stock price has fallen by nearly one-third in the past year, significantly underperforming European benchmark stock indices and industry peers, investors generally lack confidence in its energy transition and turnaround plan. However, this potential large-scale acquisition deal has disruptive significance for Shell. However, this super mega-merger will face major challenges, including BP p.l.c. Sponsored ADR's high debt and liabilities, potential antitrust competition issues, and the need to sell a large number of assets, all of which could pose obstacles to this large-scale transaction. Media reports citing informed sources disclosed that against the backdrop of weak international oil prices due to the global trade war initiated by the Trump administration, Shell management is evaluating this potential large-scale acquisition. Since then, analysts have begun to assess the pros and cons, especially what it means for Shell's fundamentals and performance prospects. Here are their main conclusions: Emergence of oil giants UBS Group AG's analyst team noted that after the merger of the two London-based oil giants, their overall upstream oil and gas production will reach nearly 5 million barrels of oil equivalent per day, an increase of 85% from Shell's current approximately 2.7 million barrels per day, making them the world's largest investor-owned oil and gas production giant. For comparison, the world's largest oil and gas producer, Exxon Mobil Corporation, based in the US, had an average production of approximately 4.6 million barrels per day in the first quarter of this year, while another US oil and gas giant, Chevron Corporation, was around 3.4 million barrels per day. If BP p.l.c. Sponsored ADR's shale subsidiary BPX in Denver, USA is formally included in Shell's business map, it could to some extent make up for Shell's regret at selling its Permian Basin business to ConocoPhillips in 2021 and missing out on the boom in the oil industry. Swann, who was in charge of upstream business at the time, is now CEO of Shell. LNG dominance According to RBC Capital Markets analyst team, the latest statistics show that Shell is already the world's largest liquefied natural gas (LNG) seller, and if it acquires BP p.l.c. Sponsored ADR, its business will be "pushed to new heights." The combined annual LNG sales of the two companies will exceed 90 million tons, accounting for over 20% of the current global LNG market. This massive global presence will unleash more trading opportunities and business optimization opportunities - in the volatile natural gas price environment, this is crucial for LNG business profitability. In addition, the merger of their sizable LNG fleets would significantly reduce high LNG transportation costs. Expanding trading operations BP p.l.c. Sponsored ADR and Shell are already among the world's largest commodity traders. Their extensive physical assets, from refineries to transportation pipeline networks, provide a unique advantage for comprehensive market insights. While information about the trading operations department is not transparent, some oil and gas companies have disclosed some key value clues: over the past five years, BP p.l.c. Sponsored ADR's overall trading operations have increased the return on capital by about 4 percentage points; over the past decade, Shell's trading department has also seen an increase in returns of between 2% and 4%. It is unclear whether the merger would increase returns enough to offset the acquisition premium. The RBC analyst team even questions, "Shell already has its own trading organization, are they willing to pay a high price for another commodity trading platform?" High costs The RBC analyst team estimates that acquiring BP p.l.c. Sponsored ADR may require a premium of about 20% on its 57 billion pound market value. Some costs can be offset through synergies, but the amounts involved are relatively small. Preliminary forecast data from RBC shows that the merger could bring about $1 billion (after-tax) in synergies in the first year, possibly increasing to $2 billion in the second year; in addition, capital expenditure synergies could reach about $1 billion in the first year and about $1.5 billion in the second year. Measured against Shell CEO Swann's metric of free cash flow per share as "Polaris Inc.," RBC believes that due to significant synergies and capital reductions, the deal could increase Shell's free cash flow per share from 2026. Debt and compensation One of the major challenges in this large-scale acquisition deal is BP p.l.c. Sponsored ADR's long-standing weak balance sheet. UBS Group AG pointed out that including leases and hybrid leverage capital, BP p.l.c. Sponsored ADR's leverage ratio was as high as 48% at the end of the first quarter, the highest among oil and gas giants. In addition, BP p.l.c. Sponsored ADR still needs to pay annual compensation for the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, which could continue until 2033.Year.RBC analysis team said, "The combination of debt, hybrid capital, lease obligations and commitments of BP p.l.c. Sponsored ADR, along with Macondo liabilities, can be considered a 'poisoned chalice' for the traditionally conservative Shell balance sheet." Antitrust Competition Review UBS Group AG stated that the large-scale merger would increase Shell's retail network of finished oil products by about 48%, adding over 21,000 sites for a total of over 65,000 sites. In some markets, the merged market share of the two oil and gas giants may be too high, raising concerns from antitrust regulators and potentially forcing asset divestitures. If Shell chooses to sell the market and retail business of BP p.l.c. Sponsored ADR as a whole, the RBC analysis team predicts that this business segment could be valued at around $30-40 billion. Asset Divestitures The RBC analyst team believes that Shell may also consider selling key upstream assets of BP p.l.c. Sponsored ADR in countries such as Azerbaijan, Iraq, India, and Abu Dhabi, as the Shell management may find many of BP p.l.c. Sponsored ADR's other assets not worth retaining. However, the potential scale of divestitures itself could pose a hurdle to the acquisition transaction. "The actual size of non-core assets may be too large to digest on the balance sheet, indicating that Shell may need to embark on another large-scale asset sale plan, and a large giant leaving money on the table in merger projects is not a good sign for fundamentals," the RBC analysis team pointed out.