Reports that oil major Shell SHEL is studying the merits of buying cross-town rival BP BP. have grabbed attention this week but even if a combination has strategic rationale, it doesn’t look like a deal isn’t likely anytime soon.

“Historically, large M&A in the sector occurs 6-12 months after the bottom of the oil price and, although prices are down 20% year-to-date… we doubt companies think that the worst is now behind them,” writes UBS analyst Joshua Stone.

Oil prices fell to more than four-year lows this week as an OPEC+ decision to expedite its output hikes stoked fears about rising global supply.

Besides that, other challenges confront any potential Shell-BP combination, the UBS analyst says, primarily stemming from Shell’s own stringent M&A criteria and BP’s financial position.

Shell’s management prefers buybacks and would likely be reluctant to transact quickly, Stone notes, recalling it took 2 years for its shares to recover after the BG  deal in 2015.

BP’s balance sheet is a hurdle, with its 48% leverage being the highest among majors, UBS says.
Source: Reuters