In one of the biggest deals in the oil market, the French energy giant, Total, is planning to buy out Maersk Oil, the Dutch shipping giant A.P. Moller Maersk’s oil and gas business, for $7.45 billion. Total will pay for the deal with $4.95 billion of its shares and the remainder would be paid off by taking on Maersk Oil’s $2.5 billion short term debt, thus bringing the total to $7.45 billion. Total has also agreed to let Maersk retain an interest of 97.5 million shares of Total, which is approximately 3.76% of the French energy conglomerate. A.P. Moller, the Danish company’s main shareholder, may also be offered a seat on the board of Total.
Total will also handle all decommissioning operations, amounting to $2.9 billion, and will continue to maintain the Dutch company’s oil position in the North Sea through bases in Copenhagen and Esbjerg. Total plans to make Denmark its hub for operations in Denmark, Norway and the Netherlands. With this deal, Total will become the second largest oil company to operate in the North Sea. The deal is expected to close in the first quarter of 2018.
This deal with Maersk will prove beneficial to Total in many ways. Firstly, it will lead to a cost savings to the tune of $400 million per annum, as well as an improved cash flow and an immediate increase of production by 6%. It is also expected that the production will increase further from the current 2.5 million BOE (barrels of oil equivalent) to 3 million BOE as early as 2019. The other benefit will be that Total will be able to continue its strategy to move its production from high risk areas such as Iran and Qatar to safer OECD (Organization of Economic Cooperation and Development) countries.
For A.P. Moller Maersk, this deal also makes sense, as it has been going through a massive restructuring to focus on its core business of transport and logistics. The company started the process a year ago as it tried to combat one of the lowest shipping down-cycles and a record slump in the oil market. This sale will give a great capital boost to the company to help with its restructuring.
After a long and painful downturn, this deal seems to be heralding some stability in the oil and gas industry. This deal will be the biggest for Total since its acquisitions of Belgian competitor PetroFina in 1999, and French rival Elf Aquitaine in 2000. In fact, it is the biggest deal in the sector after Shell bought out BG Group for $50 billion dollars in 2015. Most other companies have focused on piece meal acquisitions or divestments in the last few years, so a deal such as this sends a positive signal to investors of future growth.
While most of the European market showed a downturn in trading due to the renewed tensions between the US and North Korea, the deal between Maersk and Total did bring some good news for Maersk, with its stock jumping up. MAERSKB jumped 2.89% and MAERSKA went up 3.53%, with a total gain of 5.1% in Copenhagen in today’s trading. Total faced mixed reactions, with Total SA FP going up 0.13 points, a modest 0.30%, but Total TOT fell 0.28%. Total shares were down by 0.6% during early trade in Europe.
This slight dip could be because of investor concern with regard to the current falling oil demand. However, analysts feel that this deal is a step in the right direction and shows the industry finally may be coming out of one of the worst slumps.