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Analysis

Big oil’s huge losses raise prospect of mega mergers

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When Exxon struck the biggest deal of a $300bn wave of oil mergers during the brutal late-1990s crude price collapse, Mobil chief executive Lou Noto gave a warning to the industry.

“We need to face some facts,” he said as he announced his company’s takeover. “The world has changed, the easy things are behind us. The easy oil, the easy cost savings, they’re done. So all of us are now looking for some way to make a jump.”

Now the finances of the supermajors those deals created are in tatters, just as the rise of clean energy and doubts about long-term oil demand force another existential reckoning — and the prospect of megamergers is on the cards again.

“We’ve had two price crashes in the last five years and we’ve seen a lot of money leaving the sector,” said Greg Aitken, head of mergers and acquisitions research at the consultancy Wood Mackenzie. “We’ve seen a lot of concerns about energy transition and ultimately demand destruction and a lot of uncertainty about how quickly that’s going to happen. So big strategic tie-ups and deals — those are entirely feasible.”

ExxonMobil, Chevron, BP and Shell recorded more than $50bn in losses between them last year, as the pandemic-driven crash in oil demand crushed crude prices and forced them to slash their spending plans

Reports last week that Exxon and Chevron discussed what would have been the biggest industrial merger in history during the depths of last year’s market bust are a measure of the panic that swept through the sector.

Column chart of Disclosed deal sizes ($bn) showing Upstream oil and gas M&A*

“The situation looked so desperate last spring and it was unclear how bad it was going to get,” said Daniel Yergin, vice-chairman of IHS Markit and author of The New Map, a recent book on the oil sector.

The desperation has faded but investors say big deals would be a welcome reset for a sector that was shedding value before the crash and is now watching the investment landscape tilt towards cleaner rivals.

Darren Woods, Exxon chief executive, said last week that the company was on the hunt for deals and looking at companies that could “grow value, unique value” and complement its portfolio, in what some analysts said was a nod to Chevron.

A tie-up between the US supermajors would make “eminent sense,” according to one Houston energy banker, creating a more profitable oil portfolio to compete with low-cost Middle Eastern and Russian suppliers. Such a deal could also free up capital to spend on the low-carbon technologies investors are demanding.

But scale is a key driver — part of a “last man standing” strategy for survival even if oil demand shrinks over the coming decades. A combined Exxon and Chevron, for example, could produce close to 6m barrels a day, more than any Opec country other than Saudi Arabia.

“Scale is a real enabler of cost efficiency,” said Nick Stansbury, head of climate solutions at Legal & General Investment Management, which holds shares in many supermajors.

Big deals would also help some companies “get out of the penalty box”, he added, allowing producers to align their business to “play an active role in the transition”.

Line chart of $bn showing Supermajors’ debt burden has swelled in the past decade

Despite last year’s mammoth losses, short-term pressures on operators have eased thanks to a rebound in oil prices, which struck a 12-month high close to $60 a barrel this week.

Some observers think the rally and a growing industry consensus that prices will keep rising have lessened the pressure for a dramatic course correction.

Exxon and Chevron have probably “moved past” the need to combine, according to Sam Margolin, managing director at Wolfe Research. “Both companies have stabilised now and have a very transparent plan out to 2025,” he said.

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But others say bigger concerns still loom over the sector, compelling it to consider radical solutions.

“This isn’t just about the near term, it’s about a long-term energy transition, demand destruction, price volatility . . . and the twilight years,” said Mr Aitken, referring to the possibility of those kinds of deals. A historic oil crash had left “no sacred cows”, he added.

Analysts at Morgan Stanley last year raised the possibility of Exxon or Chevron buying a US electricity producer as a “potentially more attractive strategy” than buying more oil production.

Still, although Royal Dutch Shell and Total have said they would like to go from Big Oil to Big Energy, transformations such as oil-dominated Dong Energy’s reconstitution into clean-energy focused Orsted will be tricky to pull off.

Line chart of $bn showing Supermajors’ market capitalisation

As oil company share prices slid last year, with BP’s market capitalisation more than halving to $50bn, bankers and energy analysts speculated about the company becoming an acquisition target as well as broader consolidation in the European sector.

But hurdles would stand in the way of another wave of megamergers — not least government scrutiny of such deals. And selling oil assets to raise funds for transition projects is tricky when potential buyers are also reducing exposure to fossil fuels.

“If you have to sell assets, where do they go? It’s not as easy as it once was,” one banker said. “Antitrust solutions are not as clear.”

One area where more M&A activity is widely expected is the battered American shale patch, where more than $50bn worth of deals were struck in the second half of 2020, according to the data provider Enverus.

Behind the mergers was operators’ need to amass scale, drive down drilling expenses and eliminate some of the shale sector’s notoriously bloated general and administrative costs.

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More deals are likely, especially in the prolific Permian shale fields of Texas and New Mexico, following President Joe Biden’s executive orders to clamp down on drilling on federal land, according to Lee Maginniss, a managing director at the consultancy Alvarez & Marsal.

“Companies with large inventory of non-federal drillable locations have just gotten more attractive,” said Maginniss. He expects at least another big deal or two in the Permian this year, as the big US independent producers consolidate.

Chevron has already bought Noble Energy, which had shale assets as well as an international gas business. Supermajors are still hovering over the shale patch with intent, analysts say.

Top-tier operators such as EOG Resources, Pioneer Natural Resources, Diamondback Energy and ConocoPhillips — with productive fields, relatively sturdy finances and environment, social and governance plans — are all prime targets.

“We are in an era of consolidation,” Mr Yergin said. “But in shale.”



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Analysis

Death of the call centre? Workers ring in the changes during WFH era

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A new message frequently punctuates the muzak as customers wait to speak to a call centre worker nowadays: a recording warning them to expect “home life noises in the background” once someone answers.

“A friend of mine heard splashing water when she called her bank,” said consultant Ursula Huws, a long-term advocate for staff to be allowed to do their jobs from home and who coined the term teleworking in the early 1980s.

“The agent revealed she was in the bath. For an industry historically so resistant to remote working, that speaks volumes about how far things have come in the past 12 months.”

Before coronavirus arrived in the UK, only 3.8 per cent of the country’s 812,000 call centre workers were based at home, according to research group ContactBabel — below the 5.1 per cent average for the working population.

But as the government introduced sweeping restrictions in March last year, the pendulum swung. By November homeworking was almost twice as common among call centre staff as the general workforce with about three quarters of 139,000 agents surveyed saying they were home-based.

This looks set to remain. A recent poll of 107 call centre managers and directors conducted by industry bodies found just four who anticipate a full return to the office.

HSBC has confirmed its 1,200 call centre staff will remain at home permanently. Outsourcer Capita has said many of its 16,000-strong call centre workforce in the UK can do the same, while rival Teleperformance has indicated many of its 10,000 employees will be allowed to continue working remotely once the pandemic subsides.

First Direct customer service representative at a call centre in Leeds, England
Working from home has allowed call centres to shed costly office space © Chris Ratcliffe/Bloomberg

The shift will have far-reaching consequences: for the working lives of hundreds of thousands of people employed in the sector, for commercial landlords and for customers relying on their services.

Working the phones

The earliest known example of a call centre in the UK was in the Birmingham Post and Mail building in 1965, but it was not until the establishment of Direct Line in 1985 that they became more widespread. From 63 staff at the insurer’s call centre in Croydon, the industry has since mushroomed into one of the UK’s largest.

For a sector weighed down by a reputation for frenzied offices, distrustful management and high attrition rates, the post-pandemic world in theory offers a chance for a reset.

“Call centres are . . . a fun punching bag for a lot of people,” admitted Gary Slade, Teleperformance’s UK chief executive. But he insisted that a hybrid working model will offer his employees “more choice” rather than simply being an opportunity “to squeeze the staff by cutting costs and removing benefits”.

Yet half a dozen staff who spoke to the Financial Times on condition of anonymity, two of whom are Teleperformance employees, said remote working had made their jobs more difficult — or alleged they were being denied the right to do so.

One 26-year-old, who works for an online travel platform, described the stress from solving more complex customer queries from home as “all-encompassing”, while a 21-year-old Teleperformance agent said virtual training was “difficult to absorb”, adding that he often “had to wing it”.

Two are office-based, one of whom is working for an outsourcer in Liverpool having had repeated requests to do so remotely rejected for “no apparent reason”.

Chart showing that WFH improves staff morale but raises performance concerns

Privacy is another concern. Teleperformance has already butted heads with Unite, Britain’s biggest trade union, and the Communication Workers Union over concerns about a plan to issue remote workers with webcams.

Slade said reports they will be used to monitor staff at will are “absolutely not true”. He said webcams will be used to replicate “the checks and balances” that are normal in the office.

The FT has seen an internal memo sent to Teleperformance staff suggesting video calls could be mandated to “conduct clean desk audits” and “[detect] unauthorised objects in [an] employee’s workspace . . . such as a mobile phone”. Slade said “occasional checks” are essential to “avoid data breaches”, adding that the webcams are “not designed to be remotely activated”.

But Jamie Woodcock, who went undercover in a call centre for his book Working the Phones, fears what he describes as “callous management practices” mean the chance to improve the workplace culture with the adoption of remote working will be “squandered”.

“Managers in call centres rarely ask workers what will improve their work, instead they simply rely on ever stricter targets and monitoring to get results,” said Woodcock.

Aimie Chapple, Capita’s executive officer for customer management, insisted she was “always checking in” with staff such as during virtual coffee mornings but that a balance has to be struck between “what employees want [and] what clients want”.

Others are more optimistic. The migration of consumers online during the pandemic has prompted a hiring spree to meet demand for helplines. “Thanks to the work from home model, they’ve been able to tap into wider talent pools,” said Leigh Hopwood, chief executive of Call Centre Management Association. “A call centre in Bradford can now easily hire an agent in London.”

Landlords put on hold

The prize for call centres allowing staff to work from home is the freedom to shed costly office space.

Capita saved £10m from office closures during the first UK lockdown and has now permanently closed 49 sites worldwide, nearly a fifth of their commercial real estate holdings, with plans to offload more.

In the UK, Santander has scrapped plans for a £75m call centre in Merseyside that would have housed 2,500 workers, while travel group Saga has put a 600-capacity call centre in Kent up for sale.

The call centre industry is important to the north of the UK

That could pose a problem for landlords in regions where call centres are a major employer. “Are they lettable? It hangs on the location. Some of these [operators] went to locations which had high unemployment and not a lot of other industry,” said Mat Oakley, head of UK and European commercial property research at Savills.

In the north of England and Scotland more than 6 per cent of the local population are employed in call centres, according to ContactBabel.

They are often thought to be unappealing workplaces. “Secondary office buildings in Dundee, Prestwick, East Anglia . . . on business parks like the one where [TV show] The Office was filmed,” said one analyst.

Many suffered during a wave of offshoring in the early 2000s but customer preferences led to a return, said Oakley, who also argued that concerns about high staff turnover led to improvements in office quality.

That will increase their chances of being re-let to other businesses or to the government as part of its drive to disperse employees around the regions, he added. “Many of these centres are in the north of England, I expect quite a few will get taken up as part of the government’s move of civil servants away from London. That’s the obvious tenant.”

Customer service

Both Slade and Chapple insist productivity, as measured by metrics like average call handling time and first call resolution, have remained consistent or even improved despite homeworking.

However the shift has presented new dilemmas for satisfying customers and maintaining data security. 

“At very least, a dog barking or a baby screaming in the background [of a call] will come across as unprofessional,” said Teresa Cottam, chief analyst at telecoms consultancy Omnisperience. “But if [the agent is] handling sensitive medical or financial data and their flatmate is next to them that opens the door to fraud and crime.”

Call centres are able to remotely monitor technology “to the nth degree”, she said, but adds the “human factors” remain “very risky”.

Huws forecasts that, regardless of the great WFH experiment, employees will eventually be asked to return to the office. “Face-to-face meetings and handshakes are in call centre managers’ muscle memory,” she said. “Juggling a hybrid workforce requires good management and they’re not really allowed to be good managers.”

Sir Peter Wood, who co-founded Direct Line, rues that the heyday of the call centre “has long gone”. “I used to man the phones just for fun and sometimes call customers back . . . when they were rude to my staff,” Wood recalled. “But the romance of call centres is a thing of the past.”



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Musk well-positioned to steer cryptocurrency’s future direction of travel

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When Elon Musk revealed three months ago that Tesla had bought $1.5bn worth of bitcoin, fans of the digital currency claimed the move would hasten its wider adoption as a tool of corporate finance.

On Wednesday, however, Musk withdrew his personal endorsement, swearing off accepting the cryptocurrency as payment for Tesla’s cars and undermining the company’s justification for using it as a destination to park its spare cash.

As usual, Musk’s comments provided immediate fuel for crypto traders as well as ammunition for the warring crypto tribes on Twitter. But it was harder to tell whether his announcement would have any effect on wider perceptions of the currency, or what role Musk’s views will play in the next phase of crypto adoption.

“He’s always saying things every two days and isn’t consistent,” said John Coffee, a professor at Columbia Law School. Tesla’s pretensions to pushing bitcoin into the mainstream of corporate use always sounded secondary to its interest in pure financial speculation, Coffee added. “I think his first investment was much more of a currency investment than anything else.”

Whatever lies behind Musk’s on-again, off-again love affair with bitcoin, his effect on market prices has been hard to ignore. The currency’s price jumped 15 per cent on the day that Tesla’s investment was revealed, and fell 6 per cent in the 24 hours after this week’s announcement.

The latest drop came just days after Musk jokingly denounced dogecoin — another cryptocurrency that he had heavily promoted — as “a hustle” on US television, sending its value down 15 per cent.

“Without question, he’s become the single most important factor in crypto,” said JP Thieriot, chief executive of crypto exchange Uphold. That influence extends beyond Musk’s ability to move prices and helps shape how people think about digital currencies, Thieriot suggested.

Even Musk, however, can’t force cryptocurrencies into mainstream commercial use. He said this week that Tesla had backed away from accepting payment in the currency because of the environmental effects of the energy-intensive “mining” that goes into validating transactions — a well-known issue he has ignored in the past. 

Many crypto experts said that Musk’s change of heart appeared to reflect an acceptance that bitcoin was not suitable for payments. Other companies that had accepted bitcoin as a form of payment in the past, including Dell and Microsoft, also later dropped it.

“I don’t think a lot of people want to spend their bitcoin,” said Wilson Withiam, an analyst at crypto research group Messari. “If there was actual money behind it, would [Tesla] have actually done that?”

Musk’s change of heart extended beyond the issue of payments. He also swore his electric carmaker off becoming an active participant in the bitcoin market, saying that it “will not be selling any bitcoin”.

The commitment came two weeks after Tesla surprised Wall Street with a $101m profit from selling part of its holdings, raising worries that the company’s performance would increasingly be tied to crypto trading.

The pledge not to sell may have reassured some investors, but it also effectively undermined Tesla’s case for using the currency as part of its everyday corporate treasury operations.

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Zach Kirkhorn, Tesla’s chief financial officer, told Wall Street two weeks ago that the liquidity of the bitcoin market justified Tesla holding the cryptocurrency, since it meant the company could buy and sell actively.

That flexibility was particularly important, he said, as Tesla faced greater cash demands to finance plants in Texas and Germany while also dealing with extreme financial stresses in its supply chain caused by the global semiconductor shortage.

“Being able to access our cash very quickly is super important to us right now,” Kirkhorn said. With one tweet that promised to lock in the company’s crypto investment, Musk has torpedoed that rationale.

Some bitcoin backers said that Musk had still helped prepare the way for the wider adoption of bitcoin by corporate treasurers by encouraging other companies to view it as a valid holding — even if there have been almost no examples of others announcing they were buying the currency.

His initial enthusiasm for bitcoin had generated interest — including among treasurers — that was likely to continue well beyond his recent turnround, said Rayne Steinberg, chief executive of digital asset management group Arca. “People were talking about it, it entered the zeitgeist.”

Some corporate treasury experts, however, said that Tesla’s flirtation with cryptocurrency holdings had done nothing to encourage wider adoption.

“It created conversation among treasurers, but I don’t think it changed anyone’s mind,” said Jerry Klein at Treasury Partners in New York. The overriding requirement for treasurers to preserve the value of their companies’ cash had completely ruled out cryptocurrencies, Klein added.

But if Musk’s dabbling in bitcoin failed to change the currency’s standing in the corporate world, his latest intervention has raised another prospect: that he could become a kingmaker for a future cryptocurrency to rival or even supersede bitcoin.

Using his celebrity to draw attention to bitcoin’s large energy consumption — and that many participants in the network are in China, relying on coal-fired power stations — could hasten the search for alternatives, according to supporters. Surveys of millennials and Gen Z, who are big buyers of cryptocurrencies, showed that they were also deeply concerned about climate change, said Thieriot at Uphold. “Eventually, those things have to converge,” he said.

Musk’s comments provoked an immediate scramble for attention among backers of cryptocurrencies that claim to have less adverse effects on the environment. Those included Bitcoin Zero — a carbon neutral version of bitcoin — and Cardano, one of several networks that use a so-called proof of stake mechanism to validate transactions, consuming less energy.

Most newer networks, however, have struggled to win attention and a share of crypto investment. Most of the displaced attention has focused on ether, the digital token used on the ethereum network. With a total value of $440bn, its tokens are worth almost half as much as bitcoin.

Ether is already used by some investors as a form of digital money, and its long-planned move to a proof of stake system could finally be completed within the next year, putting it in a strong position to win wider support, said Withiam, the analyst at Messari.

Musk did not show his hand about which cryptocurrency will win his favour as he turns away from bitcoin, saying only that it would be a token that consumes less than 1 per cent as much energy. His open-ended comment is bound to leave crypto investors guessing — and guarantee that all eyes stay fixed on his tweets for the next clue to his thinking.

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UK’s voter ID plan ‘an expensive distraction’

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When the Queen announced in parliament this week that the British government was planning legislation that would require voters to carry photographic identification, her words stirred up worries nine miles to the east, in the London borough of Newham.

Junaid Ali, organiser of the Hope for Humanity Food Bank, which operates from a rundown shopfront in the deprived, multicultural West Ham area of the borough, said families using the service on Tuesday told him they would struggle to find the documents voters are expected to need.

“A lot of the families do not have identification,” Ali said.

Such stories — allied with the near-absence of in-person voter fraud — have raised suspicions that the proposed legislation is an attempt to make it harder for some sections of Britain’s electorate to vote.

A study commissioned by the Cabinet Office and published on March 31 found that 9 per cent of UK adults lacked photographic identification that was still valid and had a recognisable photograph.

Ali said many people reliant on the food bank were citizens of Commonwealth countries such as Pakistan — who have the right to vote in the UK — but that many spent long periods without identity documents while the Home Office processed their visa and immigration applications.

“For asylum-seeker families, the ID is held by the Home Office,” Ali said.

A man hands over ID at a polling station in New Hampshire, US
In the US there have been accusations that new voter ID laws in the likes of Georgia and Florida are part of an attempt to stop black and other minority groups from voting © Suzanne Kreiter/The Boston Globe/Getty Images

The UK government’s move received backing from former US president Donald Trump on Tuesday who said the UK measures were “exactly” what the US should do. There have been widespread accusations that new voter identification laws across a swath of Republican-controlled states — including Georgia and Florida — are part of an attempt to stop black and other minority groups in America from voting.

Jessica Garland, director of policy and research for Britain’s Electoral Reform Society, the election-rights pressure group, queried why a crackdown on in-person voter impersonation was a priority for the government when it was a rarely recorded offence.

“There’s no evidence that there’s a problem that the policy is trying to solve,” Garland said. “We really think this could be quite an expensive distraction.”

Despite vocal opposition to the proposals, the government has so far refused to back down, perhaps raising the prospect of another embarrassing U-turn further down the line.

“Having photographic identification is ensuring a problem doesn’t arise,” Jacob Rees-Mogg told MPs on Thursday. “This country has an electoral system of which people can be proud and of which people can have confidence. We mustn’t allow that confidence to slip.”

The arguments surrounding voter identification have been familiar to Angela Wilkins, leader of the Labour party group on Bromley council, in south-east London, ever since the council hosted one of the pilots for the voter ID scheme at local elections in 2018.

Chart showing that in the 2017 election voters without driving licences or passports were more likely to vote Labour than Conservative

The Electoral Commission, the UK elections watchdog, said after the pilot that the majority of voters had been able to meet the requirements, although some were turned away. It added there was no evidence the requirement significantly deterred people from voting.

Wilkins, however, said she believed the commission had underestimated how many people were put off.

“A lot of people didn’t even attempt to go and vote because they knew they couldn’t because they hadn’t got the right ID,” Wilkins said.

It is unclear, meanwhile, how far the proposed legislation would address issues raised by the UK’s biggest election fraud scandal of recent years, in the 2014 local elections in Tower Hamlets, a London borough that neighbours Newham.

That case — which led to the removal of Lutfur Rahman as the borough’s mayor — related mainly to false registrations of people with no right to vote and a range of other issues, including the exercise of unlawful religious influence over voters’ decisions by Muslim religious leaders.

Former mayor of Tower Hamlets Lutfur Rahman, centre
Former mayor of Tower Hamlets Lutfur Rahman, centre in blue tie, was removed from his post after an election fraud in 2014 © London News Pictures/Shutterstock

The Tower Hamlets case took place while prime minister Boris Johnson was mayor of London. Johnson closely followed the case and after the ruling against Rahman in 2015 said: “I’m very glad that justice has taken its course and the cloud has been lifted from Tower Hamlets.”

But Johnson is also a longtime sceptic of ID cards. Writing in the Telegraph newspaper in 2004 as a Conservative MP, he said: “If I am ever asked, on the streets of London, or in any other venue, public or private, to produce my ID card as evidence that I am who I say . . . I will take that card out of my wallet and physically eat it.”

Garland said the fraud in Tower Hamlets had been caught and there had not been another similar case since.

“To introduce this measure for an entirely different kind of fraud . . . seems like the wrong lesson to be drawn from that,” she said.

It is not clear, either, whether the legislation will follow a key recommendation from the Electoral Commission — that councils should offer a free, official form of photo identification for those lacking other forms. Voters in Northern Ireland — where photographic identification has been needed since 2003, and whose experience the government has cited as evidence the proposals can work — are offered such a card.

The plans are also likely to encounter some political opposition when introduced to parliament. Libertarian-minded Conservative MPs are unhappy with the proposals; one described them as “the very sort of thing we used to tear pieces out of Labour for”. But any rebellion is unlikely to undermine the government’s 80-seat majority.

Ruth Davidson, the former leader of the Scottish Conservative party, described the plans as “total bollocks”, adding they were “a solution to a problem that doesn’t exist”.

She told ITV: “I think that given where we are and the year we’ve had, we’ve got real problems to solve in this country, and the idea that this is some sort of legislative priority I think is for the birds.”

The House of Lords is also likely to seek to amend the legislation. Liberal Democrat and Labour peers are particularly unhappy with the proposals.

Garland said the introduction of a free, official form of ID would be the “absolute minimum” required to make any system fair.

In West Ham, however, Ali said the new plans had simply added to the suspicions of his food bank’s already marginalised users about the government’s intentions towards them.

“They have concerns that it might be another way to check the data of people,” Ali said. “They’re quite scared.”

Additional reporting: John Burn-Murdoch in London and Lauren Fedor in Washington



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