Analysts at investment bank Jefferies have suggested that Shell-BG could become bigger than ExxonMobil (NYSE: XOM.US) by 2018, reheating suggestions that Exxon might seek to protect its size advantage by acquiring one of the smaller oil majors, such as BP.

BP’s market capitalisation of $125m is only a third of ExxonMobil’s $360m market cap, and the US firm would probably have the financial firepower to take control of BP if it chose to.

Legal woes a problem?

BP’s current US legal troubles might deter ExxonMobil, which would probably be reluctant to get involved in BP’s long-running and high-profile US legal battles. Exxon’s US roots mean it may not want to be seen to be profiting from a major US oil spill, albeit indirectly.

However, BP’s battles are partly of its own choosing: I suspect that the vast majority could be settled quite quickly, if the firm wanted to smooth the way for a takeover deal.

History repeated?

The last major downturn in the oil industry, at the end of the 1990s, triggered a wave of major deals that reshaped the oil and gas landscape. Exxon joined with Mobil to become ExxonMobil. Texaco merged with Chevron, and BP acquired Amoco.

This time round, I believe there’s a possibility that BP could be on the receiving end of a bid. For ExxonMobil, the attraction would be twofold.

Firstly, the US giant could cement its position as the largest publicly-listed oil and gas producer in the world.

Secondly, and perhaps more importantly, acquiring BP at a relatively depressed price would give a significant boost to Exxon’s reserves, which like those of many large oil producers, are being depleted from production faster than they are being replaced through exploration.

Is BP cheap enough?

BP currently trades on a historical P/E ratio of less than 10, but earnings downgrades caused by the falling price of oil mean that the firm trades on a 2015 forecast P/E of 17.

However, BP’s earnings will recover strongly when the price of oil starts to rise — and if Exxon did acquire BP, the US firm’s size and famed operational efficiency would be likely to improve the profitability of BP’s operations.

Buy BP?

In my view, BP is a reasonably good buy at today’s price, regardless of any eventual takeover activity.

The post Could BP plc Become A Bid Target After BG Group plc’s Takeover? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Just how bad could it get for the BP share price?
• BP shares are falling. But is the oil market actually tighter than investors think?
• How much is needed in a Stocks and Shares ISA for £357 of weekly passive income?
• Oil prices are falling. So why am I still bullish on BP shares?

Roland Head owns shares in Royal Dutch Shell. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Buffett’s $3.7bn investment in Exxon Mobil, dating from 2013, had made the company a top 10 holding in the portfolio of his Berkshire Hathaway group.

Following Buffett’s bold move, should UK investors call time on FTSE 100 oil giants BP (LSE: BP) (NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US)?

The first thing I’d say is that Buffett has a patchy record of investing in the oil sector. For example, on one hand he booked a $3.5bn profit when selling out of PetroChina in 2007; on the other, he made what he called “a major mistake” when betting on ConocoPhillips right before crude prices peaked in 2008.

Another thing to note is that we don’t know exactly why Buffett dumped his Exxon Mobil shares. Is he bearish on oil, or bearish on the company, or does he simply see better opportunities for greater returns elsewhere?

Certainly, with billions of dollars under his control, there are factors behind some of Buffett’s decisions that simply don’t apply to smaller investors. Certainly, too, Exxon Mobil’s valuation is markedly different to the valuations of BP and Shell.

Analysts expect oil companies’ earnings to fall by somewhere in the region of a third to a half in 2015. Forecasts put Shell on a P/E of 16.2 (at a share price of £22), BP on a P/E of 19.1 (at a price of £4.45) and Exxon on a P/E of 22.3 (at $91).

Exxon, then, is pricier than its UK counterparts, and remains so if we look out to 2016, where the forecast P/Es are: Shell 12.2, BP 12.9 and Exxon 17.3.

The FTSE firms also appear much superior value to Exxon when we look at dividends. While Exxon’s trailing 12-month yield of 3% isn’t bad for a US company, BP and Shell both boast yields of 5.4%.

Admittedly, analyst forecasts for 2015 mean Shell’s dividend will barely be covered by earnings and BP’s will be uncovered (compared with 1.4x cover for Exxon), but the UK companies’ cover improves with the rise in earnings forecast for next year.

Of course, BP and Shell’s dividends could come under pressure, if analyst earnings expectations for 2016 prove way too optimistic. Even so, though, BP boss Bob Dudley, who expects low oil prices to persist “into the medium term”, seems confident of managing “the new reality of lower prices” with the dividend as “the first priority within our financial framework”. Similarly, Shell boss Ben van Beurden recently told Bloomberg Television: “The dividend is an iconic item at Shell and I will do everything to protect it”.

On balance, given the relatively attractive earnings ratings of BP and Shell compared with Exxon, and their much superior dividend yields, I think if I were a shareholder, I wouldn’t be rushing to follow Buffett’s lead, and selling out of my big oil investments.

The post Should You Sell BP plc And Royal Dutch Shell Plc After Warren Buffett Sells Exxon Mobil Corporation? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Just how bad could it get for the BP share price?
• BP shares are falling. But is the oil market actually tighter than investors think?
• How much is needed in a Stocks and Shares ISA for £357 of weekly passive income?
• Oil prices are falling. So why am I still bullish on BP shares?

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Oil Majors: In A Sweet Spot?

“Oil prices tumbled on Thursday after another big weekly build in US crude inventories and a possible rise in Saudi output stoked worries about oversupply,” Reuters reported on Thursday. In early trade, Brent crude futures for April were down $1.67 at $58.86 a barrel, extending declines from Tuesday’s two-month high of $63, Reuters added. Only two days ago, the headline was: “Oil up from early sell-off as Brent sets 2015 high”.

If you are confused, don’t lose focus. 

Oil prices are holding up relatively well: Brent crude at $30-$40 a barrel is not the medium-term target. Saudi Arabia and other Opec members won’t sit idle for long, in my view. Oil prices go up and down in cycles, and this is simply a time when oil majors must cut back on heavy investment and slash operating costs in order to continue to pay dividends and report economic profits.

Things are a bit different for smaller players. As revenues plunge, they find it more difficult to procure the necessary working capital funding — for survivors, one option would be to consider deeper diversification into, say, services.

It Could Have Been Worse…

Brent crude has halved since July 2014, yet the shares of Exxon are down only 10% over the period, while BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) have lost about 12% of value. Dividends do not mitigate the losses. 

That’s not a terrible short-term performance, however. You’d feel safer if you were invested in oil majors in a world where oil prices surge to $80 a barrel, wouldn’t you? Well. that’s the world you may be living in by the end of this year. 

Either way, it’s not just about oil prices for the stocks of major oil producers. What matters, really, is how quickly producers adapt to a changing environment. Based on trading multiples, Exxon’s 33% more expensive than BP, which, in turn, is less attractive than Shell. Their strategies and the way they have communicated with investors in recent months are elements to like, in my view.

If anything, asset disposals won’t be easy to execute. 

10% Upside 

I have been keeping a close eye on Exxon for a few years now: the world’s largest publicly traded oil company is still a terrific yield and growth play, in spite of depressed oil prices, although I appreciate Exxon does not trade in bargain territory. 

Exxon has had some problems in the last couple of quarters, as one would imagine, yet there’s no reason why a value investor should jump ship now, in my view. In fact, I believe this would be a good time to add Exxon to your portfolio, betting on parity for the USD/EUR exchange rate and on a more stable USD/GBP rate. 

Exxon And Tesco: So Different, So Similar? 

Buffett’s Berkshire Hathaway got rid of 41 million shares in Exxon in the last quarter of 2014, after about a year, having acquired the $3bn-plus stake in the second half of 2013.

At that time, Exxon was high on my radar: the opportunity to invest in such an attractive yield proposition (forward yield above 3%) and on the strength of the US dollar against the euro and the British pound (+20% and +4% since the third quarter of 2013, respectively, on average) was almost too good to be true.

I gave it a pass because I found a higher yield with lower risk elsewhere, recording roughly the same pre-tax performance over the period, but now am tempted to snap up Exxon, and I don’t think current weakness in oil prices justifies Buffett’s move. 

In truth, Buffett’s exit may be a big mistake — just like when he decided to cut his Tesco losses in October. Since he divested, Tesco shares have rallied to record a pre-tax-return return of about 50%…

The post Why Warren Buffett May Be As Wrong About Oil As He Was With Tesco PLC appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Just how bad could it get for the BP share price?
• BP shares are falling. But is the oil market actually tighter than investors think?
• How much is needed in a Stocks and Shares ISA for £357 of weekly passive income?
• Oil prices are falling. So why am I still bullish on BP shares?

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.