US Oil Giants Chevron and Shell Discussed Merger, As S&P Warns of Industry Downgrades

The Wall Street Journal reported on Sunday (paywall) that Chevron and ExxonMobil, the two “descendants” of Standard Oil, held preliminary merger talks early in 2020.  Apparently, the discussions did not continue past their initial phase, but they were serious enough that some of the possible terms were put in writing.  The talks took place at a time when the industry was under increasing stress due to sharp declines in the price of oil.  This week the ratings agency Standard & Poors (S&P) warned 13 large oil companies that they were at risk of having their credit risk rating downgraded from “intermediate” to “moderately high” due to the loss of demand for fossil fuels, poor profitability, and volatile prices.

Why This Matters:  The handwriting is on the wall, and it is not hard to read. But it’s nothing personal — all oil and gas companies are high risk according to the S&P.  These two companies may still wield some power due to their sheer size and overall market capitalization, but it’s declining as investors and creditors are beginning to bail.  President Biden’s suspension of oil and gas permits on federal lands and waters did not help industry trends.  With renewable energy’s share of the market continuing to increase, there is only one way for big oil fortunes to go — down. Oh, and we seriously doubt that Chevron and Exxon are ever getting back together.

Can Chevron and ExxonMobil Re-unite? 

The two companies were separated on anti-trust grounds in 1911 when U.S. regulators re-shaped the entire oil and gas industry.  The two companies combined would be worth more than $350 B, and they would together be the world’s second-largest oil company by market capitalization and production, with only Saudi Arabia’s state oil producer, Aramco, being bigger.  But it is highly unlikely that in a Biden administration a merger like this would be possible.  People familiar with the negotiation believe that both companies might regret having missed the opportunity to merge during the Trump administration, which would have been much more lenient in allowing it.

A Lower Grade

According to the S&P, the entire oil and gas industry is on the decline due to the move away from fossil fuels, poor profitability, and volatile prices. As a result, it warned Australia’s Woodside Petroleum as well as multinationals Chevron, Exxon Mobil, Imperial Oil, Royal Dutch Shell, Shell Energy North America, Canadian Natural Resources, ConocoPhillips and French group Total.  The lower credit rating does have an impact beyond the bad PR.  When their credit rating goes down, it is more expensive for companies to borrow money because they are seen as higher risk.  This news follows immediately after the world’s biggest funds manager, BlackRock, said it might dump shares in big greenhouse gas emitters and redouble its efforts to keep the global temperature increase to 1.5C by 2050.

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