Speculation mounts over a Shell-Texaco merger

THERE IS GROWING expectation inside Texaco that talks with the second biggest oil company in the world, Royal Dutch/ Shell, about a possible downstream join venture in Europe could lead to a full blown take-over. A Shell/Texaco merger would create a group capitalised at around $184 billion - making it the world's biggest oil company.

Texaco's senior managers have been forced to reassure staff their fears that thousands of jobs could be endangered by a Shell merger are not justified at present. But this has failed to dampen internal speculation.

Texaco and Shell have already approved an agreement to create the largest refining and marketing operation in the US. Talks about a similar move in Europe have been underway for some time with an announcement thought to be imminent.

The need to turn these talks into full merger discussions is considered to have increased in urgency after the decision by British Petroleum to join forces with Amoco in the largest industrial tie-up ever seen.

Alan Marshall, an energy analyst at Robert Fleming, said a deal between the two companies would have considerable logic. "It would not be difficult deal to do, although it would not necessarily be value enhancing either. The market would see Shell as getting bigger, but not necessarily better."

Last night a Texaco spokesman said: "We have been looking at a number of new indus- trial alliances in Europe, but I think that a full scale merger is just wild speculation." A Shell spokesman said: "Texaco is one of a number of people we are talking to about downstream operations, but I am not aware of any more than that."

Shell's new chairman, Mark Moody Stuart, is under pressure to take a major initiative to boost faltering returns and rebuild confidence in the City.

Texaco, like Amoco, is seen as a laggard in the US oil company ratings. While it would not necessarily gain new management impetus from joining with Shell, the two could cut jobs and marketing capacity, particularly in the US, Europe and Asia.

One problem for a merger in Asia would be that Texaco already operates inside a joint venture, called Caltex, with Chevron. But Caltex and Shell already have a working relationship. Global regulatory hurdles to a Shell/Texaco venture would certainly exist, but the biggest obstacles have always been on the downstream side, and those have already been taken care of in the US.

Shell has traditionally been seen as the safe home for money in the turbulent oil sector. But a dynamic performance by rival BP under the strong leadership of Sir John Brown has left an increasing number of investors foresaking Shell for BP.

Last week the oil analyst team at Salomon Smith Barney reiterated its view that BP shares should be bought. "We continue to advocate a move out of Shell and Royal Dutch into BP." The UK trading arm, Shell Transport and Trading, has under performed the FTSE 100 index by 28% and the S&P 100 in the US by 33% this year.

With oil prices at their lowest level for 25 years in real terms, Anglo- Dutch giant is struggling to make promised targets. Last year it said it would obtain a 15% return on average capital employed by 2001.

Its latest interim results released earlier this month, however, showed the return at 10.2%, considerably lower than in the same half yearly period of 1997. Net income in the second quarter was down 17 %, and the shares fell 7% on August 6, the day of the announcement.

Shell has certainly become more cost-conscious. It stunned the Peruvian government last month by cancelling a US$3bn plan for a natural gas project in Camisea. Shell and its partner Mobil had become increasingly frustrated about the proposed tariff structure to bring gas from the southern jungle to Lima.

Shell has also announced plans to shut down certain activities in non- peripheral areas like Thailand, and it recently put its Kingfisher North Sea oil field up for sale. These moves were interpreted by industry experts as a change in strategy.

The BP/Amoco deal has given an insight into the kind of cost-cutting benefits that can come from joint operations. Sir John has talked about annual savings of US$2bn by 2000, but analysts are convinced it could be double that amount - mainly from cutting jobs, but there is also plenty of scope for closing over-lapping facilities. It is also expected BP efficiency can be injected into Amoco which has been a poor performer.

Shell also took a media mauling after after the Brent Spar platform sinking fiasco and failed to distance itself from a barbarous regime in Nigeria, one of its important markets.

Moody Stuart has set out to transform the company's stuffy image internally and externally. And recently 550 top managers joined in a mass medita- tion led by a Buddhist monk.