Why Eni And Total Should Merge In 2012

Includes: E, TOT
by: Uncle Scrooge

Both Eni (NYSE:E) and Total (NYSE:TOT) are large-cap integrated oil and gas companies, but if you consider the global scenario, they are relatively small when compared to the top 5 supermajors:

Company 2011 Revenues ($ Billions)

Royal Dutch Shell (NYSE:RDS.A) 378
Exxon Mobil (NYSE:XOM) 354
BP (NYSE:BP) 309
Sinopec (NYSE:SHI) 273
Petrochina (NYSE:PTR) 240
- - - - - - - - - -
Total 196
Eni 132

Source: Fortune Global 500

Also consider Petrobras (NYSE:PBR) ($120B revenues), set to dominate Latin America, which according to many analysts could be in the top 5 list by the end of the decade, thanks to its huge offshore fields such as the Tupi field. Last, let’s not forget Gazprom (OTCQX:GZPFY), Lukoil (OTC:LUKOF) and Rosneft (OTC:RNFTF): These three Russian behemoths already dominate the Russian market and are also extending their footprint in Asia and Europe, where Gazprom already controls most of the gas supplies.

It appears to me that by 2020 the global energy battle will be fought by megacaps such as Exxon, Petrobras and Petrochina, while second-tier players Eni and Total will be left biting the dust if they don’t conquer their own battlefields. And their natural battlefield, the last frontier where they already have set a stronghold, is nonetheless Africa.

In this difficult continent, where political instability, wars and corruption already are a big hurdle for those trying to do business, it would be a sound strategy for both companies to collaborate instead of competing for oil supplies. They share the first-mover advantage in Libya, Angola and Nigeria, which have aggregate proven reserves equal to those of Kuwait and are developing upstream facilities in Congo, Algeria and Mozambique, where a huge offshore natural gas field has recently been discovered.

Last but not least, these are tough times for eurozone companies, and in my opinion such a big merger would be at least marginally beneficial to the overall stability of the European currency and markets. We have recently witnessed a lot of acquisitions and mergers between French and Italian companies: Parmalat (OTCPK:PLATF) (dairy products), Bulgari (OTC:BULIF) and Gucci (OTC:GUCG) (luxury), BNL (banking), Edison (OTC:EDIHF) (electricity) are already in French hands, and in the near future Alitalia is going to be sold to Air France (OTC:AFRAF).

Italian capitalism is in decline, so unless my fellow Italians are willing to let our last national champion fall into the gutter, our government ought to sell its 30% golden share in Eni, a move that would also provide $25 billion of much needed cash to help Italy’s distressed finances, and encourage a merger with Total to give birth to the first real eurozone oil and gas supermajor (BP is British, and RDS is half Dutch and half British) capable of flying the European flag at the same level of the other superpowers involved in the energy game of the 21st century.

Disclosure: I am long E, OGZPY.PK.