BP Ripe for Takeover? Not Really, Analysts Say
BP’s stock price has plummeted 25 per cent since the explosion of an oil well on April 20th, leaving some analysts to wonder whether the British energy giant is easy prey to a corporate takeover.
News that the oil giant's "top kill" maneuver - intended to halt the worst oil spill in US history - had failed sent the shares plummeting 17 percent by mid-day on Tuesday.
BP has lost over a third of its market value or 46 billion pounds ($67 billion) in six weeks.
But others say that the dream of a mega-merger involving BP is drifting farther away from reality, not closer, as oil keeps gushing out the ruptured well.
The New York Times wrote last week that Royal Dutch Shell and Exxon Mobil "are almost certainly running the numbers" to see whether a merger makes sense.
Former BP CEO John Browne wrote in his memoirs that the company had aspired to create $9 billion in annual synergies from a possible merger with Shell a few years ago.
However, given the massive uncertainty surrounding the costs of the spill, BP may prove to be a cheap, but messy target, analysts told CNBC.com.
“Their liability exposure is all over the map. This is a huge hindrance to successful acquisition,” Tim Seymour, Partner, Triogem Asset Management, said. Loss estimates range from $20 billion to $50 billion or even higher.
On Tuesday, the company estimated the cost of the clean-up response amounts to approximately $990 million so far, Reuters reported.
The fall-out from accidents like the Deepwater Horizon explosion and others continue to cloud BP's corporate image, which may be beyond repair.
“BP's name is now so politically compromised that only the bravest company would want to take them over,” James Batty, Editor of Energy Intelligence Finance, an oil industry newsletter, said.
Others share the same opinion. “I would never buy BP,” said one London-based M&A banker, “Because they have such a poor safety record. That inevitably affects the culture of a company. It’s like buying an airline that has a history of plane crashes.”
BP officials have expressed absolute commitment to fixing the leak. "No one will rest until this job is done. BP understands that the spill may have an impact on people's day-to-day lives," Bob Dudley, BP managing director, said earlier this month.
In October 2007, BP spilled nearly 2000 gallons of mostly methanol from a pipeline in the Prudhoe Bay oil field in Alaska. And in 2005, one of BP's largest refineries exploded, causing 15 deaths.
“It's questionable whether they can continue to business in the United States,” John Kilduff, Partner at Round Earth Capital NYC, told CNBC.com.
Worse than Exxon Valdez
On Monday, BP and US government officials warned that the spill, which is already causing an environmental disaster on the Gulf Coast, may not be stopped until August.
“I don’t think that anyone really wants to take on all (BP’s) problems: the Shrimperies, the Fisheries, the Nurseries… it’s a load of trouble,” Charles Maxwell Sr. Energy Analyst at Weeden & Co, said.
“This (spill) is exponentially worse than Exxon Valdez,” Kilduff said. The 1989 Exxon Valdez oil spill was the worst spill in US history until the explosion of BP's Deepwater Horizon rig last month.
To this day, "Exxon Valdez" continues to be dropped in conversation as a euphemism for corporate arrogance and damage.
In the short-term, however, Exxonshares underperformed 5 percent in the month after the accident, but recovered most of this within just a few months.
The way in which investors have thrust off BP shares may be based less on sound financial analysis than gut emotional panic, he said.
“A twenty-five percent fall is tremendous. I think people may be overdoing this,” Seymour said. The price of oil has fallen 16 percent in the past month, putting even more pressure on the company's margins.
Seymour added, “It’s unclear how much of the move in BP’s price is due to the recent oil price drop rather than the Gulf spill."
While BP is still a multi-billion dollar market cap company with interests all around the world, “any potential buyer would need to stump up a huge wad of cash to buy out the shareholders,” Batty said.
This price tag is prohibitively high for any company, according to some. “No company is in a position to take over BP,” Maxwell said.
Experts insist that BP has mouth-watering attractions for a company like Shell or Exxon. It is the largest producer in politically stable areas like the Gulf of Mexico, Britain’s North Sea, and Prudhoe Bay field in Alaska.
Are Mega-Mergers Dead?
But nowadays the company may simply be “too big to be acquired,” according to Cleve Rueckert, Equity Strategist at Birinyi Associates.
Even BP Chief Executive Tony Hayward admitted in November 2009 that oil industry mega-mergers were dead, and the time for deals that married BP and Amoco , Exxon and Mobil , and Chevron and Texaco had passed.
“If you put ourselves and Shell together you don’t add to the resource base,” he said at the time. Shell – a $158 billion company - is the closest in size to BP, slightly trumping BP's $141 billion market capitalization.
“Shell could probably pull it off, other than that, ranks get pretty thin,” Kilduff said. “Companies like BP need vast economies of scale in order to make (deep water drilling) worthwhile.”
State-subsidized Chinese oil companies are also poised to bid for BP, but Roger Howard, author of “The Oil Hunters: Exploration and Espionage in the Middle East 1880 – 1939,” argues that there would be enormous political opposition to this, and a merger is inconceivable.
A Chinese attempt to buy California-based Unocal in the spring of 2005 lurched due to political concerns, and the US company finally merged with Chevron.
“It’s more likely we’ll see BP stripped down, they’ll sell off various units,” Kilduff said.
Some worry that, even if BP's stock price were to bounce back like Exxon's did, its business strategy may not, as the company has invested vast amounts of time and money into deep sea drilling.
Yet other experts believe that -despite growing public outrage over the spill - the likelihood of any permanent deep-sea drilling ban is low.
Many people consider deep sea drilling a gamble the US simply must take because of its dependence on oil.
"Citizens will pressure Obama to drill more. We need to take risks necessary to get gas we can afford," John Hofmeister, Former president and CEO of operations at Shell, said.
As world oil reserves dwindle, the price will be the decisive factor, analysts predict. “Give it a year or two, people won’t remember it and popular mood changes very quickly. If a year from now, the price of oil is higher, pressure will be to drill, not regulate,” Kilduff said.