What Do You Get When You Cross a BP with an XOM?

A very strange thing indeed.

There are rumors that Exxon Mobil (XOM) is considering a takeover of BP plc (BP).  I have no firm opinion on the likelihood of such a combination.  But it would be a challenge to combine these two behemoths, for more than the usual reasons.  In particular, Exxon is not trading oriented, but BP is.  BP has an extensive and highly profitable trading operation, Exxon does not.  Indeed, recent experience (the trading joint venture with Duke Energy) probably did a lot to confirm Exxon’s belief that trading is far more trouble than it’s worth.

So what would happen, in the event of a merger?  Would Exxon spin off the BP trading operation?  But who would buy, since so much of the trading operation derives its profitability from trading around physical assets?  Would Exxon just shut down, or cut back, BP’s trading?  But given that  a non-trivial portion of BP’s profits come from trading, if it were to do that the price that XOM would be willing to pay might be considerably less attractive to BP.

All things considered, it seems like a most unnatural combination.

About Craig Pirrong 223 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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