Goings-on in the BP boardroom: WTF?

BP is a genuine puzzle.  How can an enormous company of considerable long standing with some seriously impressive attributes, be so maladroit in its senior appointments?  With the summary eviction of Mr Manifold[1], BP will have had 3 chairs and 5 CEOs since 2020, and a heap of embarrassment.  This is a crazy level of volatility at the top.

It's not a company I have definitive views on; but inevitably I have had loads of dealings with them over my decades in the industry.  (They offered me a job once: but I didn't want to move to Japan.)  Here are some observations.

• Although superficially they might all look pretty similar, big multinational oil companies aren't remotely all operating under the same business model.  We can map out a spectrum.  At one end we have Exxon - fundamentally centred on building and managing physical assets; i.e. engineer-driven, and deeply suspicious of finance & trading activity, which it minimises very purposefully.  At the other end,  BP  - plenty of capable engineers and physical assets, but also exceptionally capable and commercially active traders and finance types.  At these two extremes on the spectrum, the respective P&L and balance sheets aren't very similar.[2]  
• BP has shown itself somewhat prone to accommodating the woke agenda.  The 'Beyond Petroleum' rebrand dates as far back as 2000, under the proto-scandalous John Browne[3], so that until recently the eco-'green' stuff was fairly prominent in the business, almost as much as the traditional 'green stuff'.  They have also made several 'questionable' appointments of females at very exalted levels, IMHO for the sole purpose of having wimmin in senior jobs because at least a couple of them are self-evidently not up to the job.
• More generally, they seem to hire outsiders for top jobs far more than is usual in the industry.  Really confident big companies of long standing place far more trust in promotion from the ranks of their long-term employees - rightly or wrongly. [4]
• However, the boardroom nonsense of all kinds clearly hasn't been at the expense of their trading prowess.  And overall, I have a fair degree of respect for the senior working-level management of the company across the board, who mostly seem to get on with business in an intelligent and competent way.

All that doesn't lead me to any firm conclusions about BP's future.  But the company has been such a major part of the UK business scene for so long, I have to believe many C@W readers will have well-informed perspectives on the company.  So - the floor is yours.

ND

UPDATE:  Someone pointed out to me that I couldn't possibly have been referring to Meg O'Neill, and they were right.  I wasn't.  She's good.

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[1]  Cue the obvious jokes about Manifold sins and wickedness ...

[2]  Shell, incidentally, is pretty much bang in the middle

[3]  Scandal notwithstanding, Browne was a serious oil man.  He called the market correctly in 1997, judging $10 to be the bottom (when the Economist was suggesting $6 was coming) and bought Amoco. 

Arco and BurmahCastrol at the absolute bottom of the market, doubling the size of BP.  That's impressively good business judgment - speculative, but based on solid knowledge, experience and instinct, rather than a bought-in price forecast from some 'econometrics' outfit. 

[4]  The pros and cons of this can of course be argued at length: maybe for another post.

Shell to quit London stock exchange listing?

Unloved - in some quarters ...

Shell seems to be putting it about that it might leave the LSE for a New York listing.  Well, it's already listed in NY and has been for many years.  Obviously, quitting London will save on costs to some extent, but why will the share price be liberated?  If US investors value Shell that much more highly, why doesn't this make itself felt via its NY listing price?  There'd be plenty of folk eager to exploit any arbitrage opportunity if a differential opened up.

I think we can guess the answer.  As the DTel says: "a growing focus on environmental, social and governance (ESG) measures among investors has begun to threaten [London's] status, with major [mining and energy] companies starting to defect to the US."  By "investors" they presumably mean the London-based institutional type.  

The DTel goes on:  "It comes as Shell looks to shift its business away from oil and gas towards greener sources of energy. But its hybrid approach has risked alienating traditional investors focused on profits, while failing to appease more activist investors concerned about climate change."

I have a slightly different way of describing what's going on.  For some while now it's been apparent to me that the oil majors - both IOCs and NOCs - have done the sums, and concluded that renewables etc simply aren't going to sweep them aside [the green reductio mentioned in the quote below], & that demand for the traditional oil & gas business and its products is secure for many decades to come.  The only question is: which players are going to conduct this business?

Obviously, the NOCs aren't bowing out: in fact, starting with the most recent COP, they are becoming confidently strident on the subject.  Several years ago, when Shell, BP et al were very definitely promoting their reorientation towards 'green', I discerned Exxon wondering whether it really needed to change at all:  "You can see them thinking: the world will still need oil ... maybe there's a niche for just one unreconstructed old dinosaur ...":  and in 2021 I wrote: 

Some people are making a Great Deal of Money from this - right now. And the scope for a great deal more to be made in the coming years is huge ... Even just the continued supply of simple gas to western consumers (whether the green-woke like it or not) has a lot of mileage still in it ... But the 'traditional players' seem to feel themselves unable to make the usual response to an economic reductio ad absurdum, in terms of investment (long term) and arbitrage (short term) to take advantage of the mispriced assets etc ... So: is it all simply about greenwashing? Maybe you just need the right "communications" firm in tow.  I think Shell [as well as Exxon] was hoping they could pull this one off, too. 

Traditional business

Three years on, personally I don't think there's much doubt left.  Exxon goes (or stays) without saying.  Shell, BP, Chevron, even Equinor! - are looking to pull off the balancing act.  If you're only listed in NY, you don't need to make so many of those pesky ESG declarations about how woke you are in your Annual Report**.  The company that interests me is Total: they've gone for a fairly comprehensive woke/green rebranding, and are certainly putting themselves about in the renewables space.  But it's clear they haven't remotely given up on the hard stuff, either - not least in Africa, where they seen to have been singled out by the Semtex wing of the green movement (as we noted here).

My characterisation of the current situation is that it's to be an awkward but determined balancing act for all except the utterly unreconstructed NOCs + Exxon.  The rest are going to try to have it both ways, as best they can.  The depth and reality of the green reductio is such, there's just too much money lost if they give up on the trad stuff they are so good at.  Switching SE listings will be just one of the many games they'll be contemplating.

ND 

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**Though, interestingly, you do need to make much more rigorous risk disclosures, US shareholders being highly litigious in these matters.  Several years ago Germany's mighty E.on (before it split) withdrew from its NY listing - my confident explanation is and was that they didn't like the extensive - and quantified - risk disclosures they needed to make in their US reporting about their dependence on vast and very disadvantageous Russian gas purchases.   Shell will be needing to mull that over, too.  Oh how complicated it all is! 

AEP on 'Green Boom': not quite the full picture

As oft-noted here, Evans-Pritchard is often amusingly contrarian with an interesting point to make; and equally often just plain bonkers.  His latest DTel offering - fresh from his triumphant insistence that Labour should stick to its £28 billion pledge, hoho - straddles both characterisations. 

This is the year the world’s green juggernaut becomes unstoppable - the greatest economic growth story since the industrial revolution has crossed a critical threshold

Well, we read what he writes and we know what he means: but caveats need to be entered.

1.  2024 isn't the year: it was 2018-19, as explained here several times.  This was the window in time through which shone the dazzling light of expenditure on adaptation / resilience to climate change being classified by the UN as "green", & therefore qualifying for government subsidy / underwriting etc.  At this point, every traditional steel-n-concrete industry and their bankers realised this Green thing really had something in it for them - road repairs, sea defences, flood protection measures, reservoirs etc etc.  At which point - and that's 5 years ago now, Ambrose - the switch was thrown.

(Not all Greens are big fans of this development.  For one thing, dosh for adaptation diverts funds away from what they'd prefer to be spending money on; and for another, it can be portrayed as having given up on outright prevention of climate change, which many of them still cling to.)  

2.  There's a renewal in oil & gas, too.  More than one thing can be true at once, in this complicated world of ours.  The big O&G companies - and not just the Aramcos, ADNOCs & Petronas's of this world; it's Exxon, Shell, Total, BP and Equinor, too - have tracked the spending on renewables, modelled its impact, and noticed that the green trajectory lauded by AEP isn't going to eliminate the need for oil & gas for a very long time yet to come - the tobacco industry phenomenon I've written about before.  It might have been just the NOCs, the Chinese, and the piratical energy traders who benefitted: but now the IOCs have started to reorient.  

So, quietly at first (except Total**: their buccaneering CEO is made of stronger stuff), they've started on strategies that will allow them to carry on with their traditional businesses, while maintaining at least some kind of green front.  An ostentatious readiness to get stuck into the 'S' bit of CCS is one such wheeze; a bit of renewable investment of their own is also in the mix (except for Exxon, which started thinking that maybe it didn't need to change after all, a couple of years ahead of the others).

I'm not sure how the stock markets will handle this, or the pension funds.  But be in no doubt, however the spoils are shared and the shares are held, there's a long-term viable business still there.

ND

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** This may have awkward consequences for Total, because it has been identified as #1 Bad Guy by the greens who are willing to go violent, and they plan to target it.    

Natural gas as a feature of Putin's war

At the very start of Putin's war, I asked: What plans does Little Volodya have for his [natural] gas weapon?  (day one, 24.02.22)  Well, to his utter astonishment - and mine - we in Europe have managed a whole (exceptionally warm) winter without it, and gas turned out to be not the crucial geo-political trump card he quite fairly assumed (even if this is partly down to the ignorant nonsense that we don't actually need gas, peddled by greens and swallowed by many).   We went on:

Ol' Uncle Joe Biden said something at the weekend rather bellicose about Nord Stream 2 but I kinda doubt he has in mind blowing it up, easy and rather satisfying though this would be (there's a James Bond film involving a Russian gas pipeline, as I recall) ... Which leads us to consider a Big Accident. If there's too much high-explosive shit flying about in Ukraine, well, all that infrastructure is really quite fragile (although not too difficult to repair). Quite a big chunk of Russian exports still transit Ukraine, albeit NS2 is designed to put paid to that. Who knows what any number of rogue actors might think of doing in that very large country, in the fog of war? There are plenty of people who could profit handsomely from a Big Accident...

So now we have a new Nord Stream theory being widely bruited about: it was Ukrainians wot did it!  Let's see what evidence transpires - we've had enough quite evidence-free echo-chamber speculation for my liking already.  As you'll gather from the 24 February 2022 quote above, I'm not averse to a Rogue Actor hypothesis.  There are plenty of rogues, with plenty of money and complicated interests, in the world of Big Gas.

One thing I will tell you: there's almost no chance of anyone finding a smoking gun irrefutably in the hands of the Kyiv government.  With 100% certainty, we may be sure that Rule No.1 laid down to Zelensky by Joe Biden 12 months ago, will have been No Surprises.  And - can Zelensky get by without US aid?  I don't need to answer that.  So, let the wild speculation continue.  On the stopped clock principle, somebody's guess will turn out to have been correct (my money has switched from Soros to the military wing of Greta & the Greens). 

On the subject of Big Gas actors, they don't come much bigger than my old friends at Gazprom.  We hear that Gazprom is being encouraged to set up a 'private military company' on the Wagner model, but inevitably on much more Kremlin-friendly lines.  

Why?  Easy: Putin needs to harness all the local competence he can find; and Gazprom has plenty of competent people, well versed in mustering big efforts for big projects.  And, needless to say, they are part of the Kremlin elite (indeed, one of its paymasters).  If you're simply thinking like, perhaps a Shell or a BP - engineer-heavy companies stuffed with men-of-the-world with global experience of managing complex affairs - well, that's a fair starting point: but Gazprom has traditionally engaged in the practical world with even broader scope.  Not only do they have their own bakeries,  as I described here some years ago, they have schools and hospitals, AND an armed service, complete with AFVs.  

How come?  Because Russia is a big place (until 1990 it was even bigger) and the further you get from Moscow, the more you need to deal with local warlords of the Kadryov variety.  And Gazprom has always needed to do business far and wide.  Collecting money from a distant райо́н is often as difficult for the Big G as it was for the Tsar's tax farmers in earlier years, or the Golden Horde's tribute-gatherers before them.  The arrival of the men from Gazprom in a small armoured column is often how the matter is handled (as noted here 15 years ago). 

And would you rather be on the payroll of a Gazprom motor rifle regiment, or one of Wagner's cannon-fodder 'musicians'?

ND

Energy Supply Carnage: Last Man Standing?

A very traditional business strategy, in sectors where for some reason corporate survival is by no means assured, is "last man standing". Just hang on while competitors go under or vacate the field, in the hope of cleaning up when there's nobody else left and the benefits of monopoly can be reaped.  Well, for a few years at least - until the competition authorities eventually forget how worried they once were.

The UK energy residential supply sector has offered the prospect of this for many years.  The comfortable days of the 'Big 6' - when the barriers to entry were so high that new entrants rarely stayed the course - were always likely to be under threat at some point, with chaotic fallout.  So what were those barriers?  

• Competence: gas may be a relatively easy business to participate in, but electricity is fiendishly difficult, in several dimensions, as many an apparently competent energy player has found to their cost (Shell, BP, Total, Statoil, Conoco, ...)
• Branding & trust (a.k.a. inertia): people were fairly well accustomed to, and comfortable with, buying from "the electricity board" (not realising the concept was otiose from the mid 90's, with the restructuring of the industry and the separation of the supply side from "the wires") 
• Low margins:  the business might have been comfortable for long-term incumbents, but fortunes were not readily made - indeed, once the market settled down after the initial upheavals of sector restructuring, there was always at least one of the Big 6 thinking seriously about jacking it in
• Capital adequacy:  at very least, in order to be able to hedge the commodity price risk (a very necessary requirement in circumstances of volatile wholesale prices), a basic minimum credit standing is required

This all speaks to energy supply being the preserve of relatively large, competent, well-financed companies.  Was a market of "only" six suppliers necessarily non-competitive?  There are many other sectors where six, competing properly, would be considered pretty good.  To be fair, it can be argued that the Big 6 'competed' in a rather nominal fashion, and did little actively to shake up the significant degree of customer inertia: but the acid test - the trajectory of prices for end-consumers - was broadly favourable, and had been ever since the market opened up.

The picture began to change about a decade ago when a number of aspects came together to facilitate participation by players with quite different business models.

• government and regulators were very keen indeed on seeing new entrants, and proved willing to ignore the kind of arrant dross that was applying for supply licences (interspersed with a handful of genuine and properly-financed innovators).
• for the same "reason" (presumably), Ofgem simply hasn't enforced its own rules on smaller players, e.g. the requirement to provide a telephone call-centre service to customers. 
• one of the major barriers to entry - the need for complex systems (again, particularly for the electricity side) ceased to be an issue with the advent of decent-quality off-the-peg supplier software packages at reasonable prices. 
• wholesale prices: they started on a multi-year trend of slowly falling.  This facilitates the "Northern Rock" trick: sell long (e.g. one-year contracts at fixed price), buy short (on the spot market, where because of the falling price-trend, it'll be cheaper than when you made the sale).  Buying spot requires minimal credit; which is, errrr, handy for companies that have almost none...
• the "flipping" model: price comparison firms that offered to switch customers "automatically" (i.e. passively, on the customer's part) onto the cheapest available tariff.  A supplier with next-to-zero marketing capabilty could thereby "buy" as much market share as it wanted, simply by pitching its prices accordingly.
• some of the social-policy costs levied on suppliers only apply to the larger players.

This helps explain how an inadequate company might be able to get into the energy supply game.  But why would they want to?  There is no single motive, but alongside some perfectly creditable intentions, others of them are very bad.

• genuine, albeit speculative profitability of the "Northern Rock" model - for just as long as wholesale prices continue to fall AND the supplier isn't going to the trouble and expense of hedging against the possibility of rising prices (not least, because it doesn't have the credit standing to do so! - see above).
• positive cashflow: notwithstanding various unavoidable start-up costs and system overheads, with a customer base once established the supplier is able to get ahead of supply-cost outgoings via (a) direct debit charges and "estimate"-based payments, i.e. borrowing its customers money; and (b) collecting, as it is required to do, ever-increasing "green" levies, which do not need forwarding to the relevant authorities until several months later (if indeed they are ever paid out at all) - another cheap source of "finance". 
• ease of syphoning off this cash: small players with no public profile nor recognisable corporate governance can readily and quietly play tricks like borrowing from Related Parties at outrageously high interest rates, "investing" in Related Party ventures, and paying Related Parties for extremely costly "software services" and "consultancy".  How do I know about this stuff?  Because sometimes it's as plain as day in their annual reports!  (That's for the supply firms that aren't so small, they don't have to file full accounts ...)  Where were the authorities in all this?  Evidently, neither Ofgem nor government could give a stuff.    

Until now, of course, when they are dropping like flies.  In the meantime, the Big 6 has ceased to exist!  SSE and National Power have exited: we are left with E.on (German), Scottish Power (Iberdola of Spain), good old Centrica, and of course EDF, probably only still in the game to give it political cover for its UK nuclear machinations.  True, Ovo and Octopus have stepped up to the plate: but then, so had Bulb - until last month ...

At least some of the current survivors will be hedged through to April-ish, when the prevailing energy price cap is scheduled to end (see earlier posts).  Of course, nobody will be making any positive plans whatever until the government has shown its hand on replacing the cap.  If it gets this wrong, chaos ensues, probably followed by de facto nationalisation in some shape or other (like the banks in 2009). 

But there must at least be the chance that Centrica's unwavering 25-year strategy of positioning itself to be the Last Man Standing finally pays off.  And a Happy New Year to all concerned!

ND

To Whom the (Energy) Spoils? A Genuine Puzzle

There's an interesting dynamic rumbling in the energy sector and associated financial elements, the dialectic of which is as follows:

1. We can't use fossil fuels in future, oh dear me no.  Perish the thought.  Put my pension into something else.  Let me believe that the ambulance runs on pixie-dust and electricity comes entirely from wind.  Don't allow any more production of North Sea oil & gas.  Make Shell's life hell if it even thinks about such a thing.  I might even start to feel very strongly about all this.
2. Actual disinvestment starts apace: actual pension funds switch out of fossil fuels by the billion.  For the BPs and Shells, the Centricas and even the EDFs (see below), the cost of capital starts to rise.  They actually sell some of, maybe all of, their hydrocarbon-related assets.  
3. But in the world outside of all those tightly-shut eyes & heads-in-sand, the ambulance still runs on diesel and electricity is still generated using fossil fuels.  
4. In fact, the market for fossil fuels right now is pretty tight (see previous post) AND, what with all this wind in the power fleet & other kinds of uncertainty, prices are exceptionally volatile.  They are likely to stay that way, even if in absolute terms they subside from today's level.
5. Some people are making a Great Deal of Money from this - right now.  And the scope for a great deal more to be made in the coming years is huge: particularly via assets (and managements) that are responsive enough to make hay from all that volatility - e.g. efficient & flexible gas-fired power units.  Even just the continued supply of simple gas to western consumers (whether the green-woke like it or not) has a lot of mileage still in it (at least two decades, I'm guessing).
6. But the 'traditional players' seem to feel themselves unable to make the usual response to an economic reductio ad absurdum, in terms of investment (long term) and arbitrage (short term) to take advantage of the mispriced assets etc.  

For present purposes, let's put aside the amusing cognitive dissonance that ought to be (though probably isn't) increasingly wreaking havoc with all those who like to mouth "we don't need fossil fuels" but still like to be warm etc etc.  It's the economic & commercial dissonance I'm interested in.

We can easily spot little Volodya Putin and other traditional upstream players making pots of money out of the situation.  They probably hope to make yet more.  China, though essentially an energy importer right now, will probably benefit in relative terms (that is, relative to the West) by being untroubled by 'green' scruples.  All this is easy stuff.  

But what of other business models?  Can 'western' firms somehow thrive in this crazy market?

Exxon:  it's been clear to me for a long time that Exxon, that ailing, blinkered and sluggish beast, is basically hoping it can quietly get on with not changing much at all, and not go down the costly, guilt-stricken route of Shell et al.  But is there anywhere to hide for a US stock-exchange listed firm of Exxon's prominence?  Can any others of its kind, smaller and perhaps less exposed to the limelight, pull off that trick?  

The big commodities players:  there are plenty of these big players - you all know who I mean, but slander is slander - who, if they have any scruples whatsoever, well I've never noticed.  (Ditto their shareholders: well they couldn't, could they?)   Some of these cos are indeed buying up fossil fuel assets: the energy version of money launderers and sanctions-busters.  Are the unscrupulous to be the big western beneficiaries?

A.N.Other Corp: this is where it gets really interesting.  Case study:  EIG Partners - ("Over the past decade, EIG has thoughtfully developed a quiet yet purposeful commitment to integration of ESG factors throughout our business")  - whose website homepage would encourage you to believe they are essentially investors in wind farms and solar.  But lo!  Earlier this year they quietly bought West Burton B, one of the UK's biggest, most modern and efficient gas-fired power plants, from EDF which is busily trying to reposition itself as 100% green.  And what magnificent timing: EIG has already made an absolute ton of money at WBB from the extreme market conditions of the second half of 2021.  

Here's another example: Vitol, who've also bought UK gas assets recently - this time from none other than Drax (who have problems of their own) -  and are likewise minting it this winter.  Here's how they brand this venture ('VPI'):  "We are part of the UK’s pathway to Net Zero, complementing the increase in renewable energy to power homes and businesses. Our portfolio includes hydrogen and carbon capture projects to help lower emissions and develop a future for decarbonised, dispatchable and flexible generation in the UK."  Oh and, errrr, gas-fired power plants.

So: is it all simply about greenwashing?   Maybe you just need the right "communications" firm in tow.  Good old capitalism at work:  assets change hands from those who don't know what to do with them, to those who do.  At distressed prices, if the former are panicky enough ...

Well, maybe.  I think Shell was hoping they could pull this one off, too.  Do we think it's all about shuffling the western-owned assets into less prominent, more media-savvy hands?  Or is it destined to be yet another massive transfer of wealth from the naive & decadent West to the hard-nosed East?   

ND

Oil = the New Tobacco

I have never followed the tobacco industry: the sum total of my knowledge is:

• that it features as a no-no on various "ethical" investment lists
• it's accused of pushing fags to third-world kids
• they smoke a lot in the Far East
  
• Kenneth Clarke has, or had, some sort of non-exec involvement 

Just recently I read that tobacco consumption has hit an all time high!

So what do we make of this hypocritical charade?  I'm guessing that by dint of the first bullet above, the industry has to get along with a slightly higher cost of capital than might otherwise be the case (or maybe it's done with cheap Chinese money).  Well, provided all tobacco companies face the same situation, no competitive disadvantage follows.

Secondly, all the action is presumably out of sight to western eyes, so probably nobody much cares any more: the shareholder activists have won that particular battle and have all moved on to something else.

Summing up: there must be several companies - some of them 'western' - quietly making a great deal of money from this all-time record tobacco consumption.  Meanwhile, the woke caravan has moved on - it seems everyone's happy.

Given the rash of "adverse" headlines in the traditional oil sector, I think we may anticipate oil going the way of tobacco.

• the activist shareholder lobby is all over it: indeed, it's where that self-same woke caravan has fetched up
  
• there is no way on earth that global demand for oil will slump any time soon (though it's cyclical, like anything else) - the chances of EV production meeting overall motor demand in the next decade are nil: but even Greta would presumably like to get an ambulance ride if she should need one. etc etc
• unlike coal, oil is essentially a western-dominated industry, with a vast amount of capital deployed that will not go down without a determined fight
  

In my day job I don't do a lot of oil stuff: it's too easy a commodity to deal with commercially (compared to gas and electricity) to need much specialist consultancy.  But I can tell you that in gas and electricity, the stuff that greens don't like (e.g. coal-fired and gas-fired power stations) has for several years now been quietly passing into the hands of private equity, asset by asset, SPV by SPV**.  The traditional players are hoping to run their businesses as green-approved specialists in future - made all the easier by the 2018-19 decisions that enshrine "climate-change adaptation" & "resilience" etc as Green.  

RWE is a superb and quite extreme case study (because they've got perhaps the biggest coal-&-lignite challenge), but Statoil (Equinor), Shell, BP, Total and several others are almost as striking - and are well on the way.  Ørsted (formerly DONG++) has pretty much worked the oracle already.  Most of them stumble a bit, because they ain't so hot on the ultra-high-tech that's often involved (I've watched Shell making an arse of itself at close hand) - but they are big and capable and determined, and many of them will probably learn the new ropes.  (They made a much worse hash of it in the 1990s when they all piled into the electricity sector, stupidly thinking it couldn't be much different from gas.)

So watch out for the oil industry going the same way, headed for thick-skinned ownership that will seek to profit from strong, unending global demand while the woke-west averts its eyes (and still takes holidays abroad, uses mobile phones, plays online games etc etc etc).  If this doesn't work (and I think it will), well, China will clean up.  We offshore the world's manufacturing CO2 emissions to them, and maybe we'll outsource that nasty oil production as well.  (Russia stands a decent chance of muscling in on this one, too.)

As noted here before, Exxon is the standout progress-resister, desperately wondering if it can carve out a viable "last remaining dinosaur" niche.  It ain't gonna get away with that unnoticed.  But I'm not sure it knows anything else.  The elephant never did learn how to dance.  And the Darwinian race is to the adaptable.

 ND

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** Incidentally, some of them are royally ballsing it up.  But there's so much $$$ out there!

++ How we miss dealing with a company called DONG !

Shell and BG: Big Business As Usual

Shell's agreed bid for BG has a nice, conventional feel about it - in the context of the oil-price cycle.  We know how to assess this one. 

The various bits that spun out of the old British Gas at demerger in the mid 1990's - BG, Centrica and Transco - all performed much, much better individually, a great endorsement of the split-up strategy.  And they all stayed British ! - which pleases several hardcore C@W commenters.  Centrica remains independent, and Transco went to National Grid.  The big 'Rough' gas storage facility was sold by Transco at an early stage to Dynegy of the US, but bought back in by Centrica a while later.  Does Shell count as sufficiently British to satisfy this atavistic concern ?  Personally I care rather little.

BG was always an interesting company, with assets all over the place.  Trinidad LNG production was once the jewel in its crown, plus a bunch of North Sea gas assets it was not permitted to manage proactively while still part of Old-Monopoly-BG, so it let Amoco (of Chicago) operate them.  More recently it has done good pioneering work in Brazil.  It has long been a target, periodically: and the logical acquirer is a company that really knows how to manage (and value) this lot.

Shell's move is an attempt to emulate BP circa 1998 and call the bottom of the market.  BP, it will be recalled, triumphantly called that particular bottom at $10 and bought Amoco, Arco and BurmahCastrol before anyone else had settled into the starting-blocks.  I have a feeling Shell have moved just a tad too soon, but they may not much care.  This type of deal is 'business as usual', a bigger version of all the little shale-company acquisitions that will happen when their hedges expire and the banks press for debt to be serviced.  Creative destruction - the reason it's hard to suppress capitalism.

[By the way, Shell missed out altogether in 1998-99 mega-takeover binge.  I can reveal that they seriously considered buying Enron!  - but they couldn't understand the books.  In 1998 those books were still just about comprehensible to those who grasped mark-to-market accounting (not Shell, that's for sure).  Of course, three years later they made no sense to anyone ...]

Centrica is even more interesting.  Gazprom is perenially rumoured to be eyeing it for acquisition, but as I have often written here, that's always been bullshit: they never pay cash for anything (and they have even less of that now than usual).  Of course, Centrica is a midstream+retail business, so depressed hydrocarbon prices don't automatically make it a target.  It's twice peaked at around 400p, in 2007 and again in 2013, but has been on the slide for 18 months now.  

Its portfolio weighting is still UK-heavy, with all manner of daft and complex 'obligations' and regulatory constraints as one of the 'Big 6' retailers and a major player in UK power.  Who can see their way through that minefield?  You can never rule out some middle-eastern SWF or far eastern utility with more money than sense.  It has often been said that HMG would block a Russian bid - an empty observation, see above - but what would they say to Qatar or Malaysia?  I really don't know.  

I'd say - if they are offering the usual 180 cents on the dollar, why ever not? - and I hope my pension fund agrees.

ND

What is BP Doing ?

We've discussed BP in Russia many times, wondering if they know what they are doing.  We're not the only ones this morning: the Telegraph, whilst airing a view that the shareholders will enjoy the dividend, also carries a more cautionary piece - and quite right, too.

In the context of stories surrounding another Russian energy giant, I've often pointed out that Gazprom never pays cash for anything.  It's always an "asset swap".  And why wouldn't they, being replete with the traditional Russian asset - land under their complete control - and no end of western suckers, always ready to kid themselves that a % of a chunk of said wasteland is worthy of a place on their balance-sheets.

Russian equity has many of the same characteristics: de facto control is everything.  Russians don't know what equity means.  Kto kvo?, as the saying has it - who rules ?  It ain't the shareholders.

ND

BP In Russia - Again

Now obviously I'm supposed to know about this stuff (or else shut up), and I don't have a good record on BP-in-Russia.  In 2003, BP got involved in the TNK-BP joint venture.  Around 6 years ago they were considering an even bigger play in Russia at a time when others were piling in and others still (Shell and yes, even the mighty Exxon) who had already got in were getting a kicking in the usual Russian manner.  On this occasion BP (wisely, in my view at the time) held back.  In due course, 2008, and TNK-BP gets a kicking of its own, with Bob Dudley being sent packing in the boot of a car or some such skullduggery.

But of course those endless reserves of oil and gas are forever beckoning, and Russia's need for inward investment (and technology-transfer) is likewise never-ending.  In due course (early 2011) BP made another bold play, this time linked to Rosneft (a company now more in favour than Gazprom).  At the time I gathered, wink wink nudge nudge, that however implausible, they knew what they were doing.  It rapidly seemed I was wrong however (CU always said this) and the kicking recommenced with even greater ferocity.  How many beatings can a company, already on the back foot after Deepwater Horizon, take ?

But no, they are hanging on in there with another round of Big Plans.  What prize is so tantalisingly close that they can justify the effort ?

Perhaps it's as simple as this: the unchanging fundamentals of Russia's vast natural resources and its extensive needs - $1 trillion, we are told, and who's to doubt it ?  If BP are wrong about this they are in very good company: the Big Oil herd stampedes resolutely eastwards, irrespective of massive periodic setbacks. Putin spent time in London with Cameron during the Olympics, and now more Russians are coming to town to display their wares.

On the other hand, I can't quite shake off the idea that BP is being badly advised ...  this one will run and run.

ND

BP In The News - For All the Wrong Reasons

With everyone else away, I'll do a short silly-season run of company-based pieces - energy, of course - starting with BP.   

CU always told me that BP's efforts to get back in with the Russians were ill-fated. 

My BP insiders said otherwise.  Yes, they said, we were burned last time around (like Exxon and Shell and Chevron and Marathon and ...) but this time, *nudge nudge*, everything is going to work out.

What is is with oil companies and Russia ?  Well, huge reserves, for one thing.   And somehow it will all be different next time.  But it never is, because the Russians don't change their ways in a hurry: they never have, and why would they start now ?  Might is right, contracts mean nothing, win-win is for wimps.

Anyhow, against all better judgement I sort-of believed them (though not to the extent of going long BP, oh no, not with Two-Faced Obama still on their case).

So BP's travails continue. It's a measure of their size and underlying muscle that they can survive all this in any kind of shape at all.  But for how long can a company soldier on with such poor judgement on big issues ?

ND