Chevron shows it has the financial muscle to acquire BP - but says it plans to launch a US$75bn buyback instead

A note from the investment bank Citi suggested recently that US oilers should have their sights trained on their undervalued UK counterparts.

An update from Chevron Corporation suggests American oilers have the financial wherewithal to do this – though the will to do a transaction, in this example at least, seems lacking.

On Wednesday, Chevron announced plans to triple its budget for share buybacks to a staggering US$75 billion, making it the oil industry's biggest shareholder payout to date.

The decision comes as the company is set to report profits for 2022 that have doubled to US$37.2 billion.

While Chevron has budgeted $17 billion on new oil and gas projects this year, the company's disclosure of the share buyback and a 6% increase in its quarterly shareholder dividend signals that it will allocate a significant portion of its profits to reward shareholders.

Analysts will point out that the amount being spent by Chevron would buy around three-quarters of BP PLC at current prices.

And a report carried by Proactive on Wednesday suggested both BP and Shell PLC may find themselves at the negotiating table as American peers come calling.

It was based on a Citi research note that said a megamerger between a London-listed oil major and either of America’s largest oilers appears increasingly attractive, on valuation terms at least.

There’s a wide value gap between the transatlantic peers with the European oil and gas sector nowadays enduring softer investor sentiment, distracted by different attitudes to ESG and energy transition than seen stateside, all of which leaves an apparently widening value gap.

A megamerger would, in theory, help European valuations cinch the gap in a way that Citi doesn’t think will otherwise happen organically - or, at least, that’s the broker’s pitch.

“Markets are unlikely to close the gap by themselves,” Citi analyst Alastair Syme said in the note to clients. “The CoE of European oils remains handcuffed by investor and political headwinds. What is really needed is for the industry to arbitrage this value itself."

Syme added that in the note: “We look at the strategic imperative, financial accretion and political headwinds of either of the two US IOCs (Exxon or Chevron) potentially looking to try and acquire one of their key European competitors (BP, Shell or TotalEnergies).”

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