BP’s Gulf fiasco makes it vulnerable to a takeover

May 27, 2010

By Rob Cox and Christopher Swann

Eventually, BP will definitively stop the flow of oil from its deepwater mishap in the Gulf of Mexico. That’s when the autopsy will begin in earnest. But if the information dribbling into the public domain proves correct, the British energy giant will be a weakened creature — so weak it will be vulnerable to a takeover.

Royal Dutch Shell and Exxon Mobil are almost certainly running the numbers. Governments ought to be plotting their strategy, too.

The fiasco in the Gulf, which killed 11 workers, has shone a fresh light on BP’s poor safety track record. The current fiasco is the company’s third American offense in recent years — coming shortly after the 2005 Texas City refinery explosion, which killed 15 workers, and the 2006 Prudhoe Bay spill, which leaked more than 200,000 gallons into Alaskan waters.

The rap sheet reflects poorly on management and furthers the impression of a corner-cutting culture that Chief Executive Tony Hayward had, until recently, been widely credited with improving. The BP board’s response has equally been tepid, with little public support offered to management or guidance provided to shareholders.

Add these factors up, fold in the potential cost of clean-up, and it is little wonder that investors have wiped as much as $46 billion off the company’s market value since mid-April. At $141 billion on Thursday, BP’s capitalization is half Exxon’s and less than the $165 billion value of Shell, which has traditionally traded at a discount to BP.

Even before BP’s latest mishap, the arguments for a deal were compelling, largely because of the cost savings that could accrue. Hayward’s predecessor John Browne wrote in his memoirs that BP had targeted $9 billion in annual synergies from a possible merger with Shell a few years ago. Those would in theory be worth some $60 billion to investors.

And though a combination with Shell or BP would be massive, the antitrust implications might not be. The company would control no more than about 6 percent of the world’s proven oil reserves. At a time when nearly 90 percent of the planet’s crude is controlled by even larger national energy groups — including Saudi Aramco and Russia’s Gazprom <GAZP.MM> — that kind of scale seems defensible. It might even be viewed as a positive factor in securing Western energy independence from potentially unfriendly oil-rich governments.

Some downstream operations in the United States and Britain would probably need to be sold, including refineries and service stations. That was envisioned in the discussions the companies held a few years ago, according to Browne’s book. But these would account for less than 10 percent of the deal’s value, JPMorgan estimates.

Such wrinkles are tiny compared with BP’s other attractions for a Shell or an Exxon. Though BP has operations worldwide, it has a big footprint in the politically stable areas that oil majors increasingly crave. It is the largest producer in the Gulf of Mexico and the UK’s North Sea. And its Prudhoe Bay field in Alaska is still the largest in North America.

So what’s stopping Exxon or Shell from pouncing? For starters, there’s still no clear indication of what happened on Deepwater Horizon, who’s to blame and what it will ultimately cost to clean things up. Any responsible acquirer would probably wait for greater clarity on these contingent liabilities before making a move. That could be months away.
And though antitrust concerns could be assuaged, the politics could prove trickier. For one, Britain’s new government might object to seeing a former national champion sold to a Texan corporation — even though BP was permitted by U.S. authorities to buy Amoco and Atlantic Richfield in years past.

Washington, too, might fear the creation of a company so big it would be difficult for the government to put its “boot on their neck,” to use Interior Secretary Ken Salazar’s language in relation to BP’s cleanup efforts. A merged BP-Exxon would effectively reconstitute a substantial part of John D. Rockefeller’s Standard Oil.

But times have changed. In 1911, when the government broke up Standard, oil was a domestic business. Today, private Western members of the Big Oil fraternity operate on a global stage facing well-endowed competitors. A weakened BP could struggle in that environment anyway. If rivals start circling, the company — and interested governments — may need to contemplate Even Bigger Oil.

Comments

The market is pricing the cost of cleanup, the likely litigation, and the damage to the BP name. This depresses the share price of a company that can potentially deliver big returns. If they were to be taken over, then the buyer would need to take on the liabilities. So the only real gain is that there would be a name change – right?

But why can’t BP just change it’s name? Maybe BritPower or something. So it’s still BP, but not in name. Let them fix the leak, go in front of congress and say sorry. Let the top people be fired. Let their strategy team pick some future heads, and then change name… Much better than a crappy and value destroying take-over. For BP to be bought by Shell. Come on! This is European regulators we’re talking about they’d put so many ridiculous limits for anti-trust reasons the company would be still-born. Same with Exxon.

Best of all would be a Private Equity buy-out. Get the share price low enough, come in with some China PE money (very very low interest), buy them out and become a monster big private company. Then there aren’t any more pesky enviro-shareholders.

Posted by nicfulton | Report as abusive
 

Only in America would a company that killed an entire portion of the nation’s economy be considered valuable.

Posted by 5280hi | Report as abusive
 

I don’t understand why they just didnt blow it up and seal it off weeks ago. Did they not think this would become the worlds biggest disaster? They need to stop playing around and just seal this quickly. Certainly there must be a way to plug this hole.

I can’t believe in my mind with all the supposed experts this thing has not been shut down after 5 weeks. God help us all.

Posted by cybdiver | Report as abusive
 

A point of clarification. The Prudhoe Bay spill was not a water based spill. Entirely on land and successfully cleaned up. All suspected pipe replaced.

Posted by sfmret | Report as abusive
 

I am sick and tired the name calling of BP. They are a fine company who developed the north slope in Alaska when everyone thought they were fools. There was an accident. However this has become a media frenzy. This is why America is becoming so anti business. There is e group of left wingers who have a tremendous amount of influence. Instead of supporting the companies they are paraded in front of congressional hearings like criminals. The people asking the questions then try to outdo each other by insulting the people attending the hearings. My advice grow up and take your liberal anti business cause. Someone in government should stand up to these left wingers.

Posted by gmmj | Report as abusive
 

Don’t get me wrong, the mistake in the gulf should never have happened. BUT I find a lot of the outrage directed at BP hypocritical — especially when many of the people who b!tch loudest, drive their cars or commute in gas-powered vehicles, drink water out of plastic bottles, or buy almost anything plastic for that matter, heat their homes, fertilize their lawns, paint… anything, wash their clothes (detergent), take (non-digital) pictures, wear nylon, polyester or acrylic, wear make-up, etc, etc….. My God, if you read the posting boards on some of these sites, you’d think not 1 person in the US used oil. These “outraged” people need to wake up and realize they’re a large part of the problem. And if they feel THAT strongly about it, then THEY need to start making some lifestyle changes. Start being part of the solution. And I don’t mean demanding clean fuel – demand this, demand that, blah, blah blah. All talk. Especially while you continue to do all of the aforementioned…. Instead, I mean find ways to reduce your consumption, walk, ride a bike, drink tap, etc, etc… And until you do, shut up, you have nothing to say that’s not completely arrogant and hypocritical.

Posted by jmsptrck101 | Report as abusive
 

They need to be”Paraded in front of congressional hearings like criminals” because they are criminals! Raping and pillaging the earth, killing people, all in the name of more obscene profits. BP cheaped out and it has cost 11 lives and the livelihood of thousands. They had no regard for anything except profits and they deserve all the scorn they are getting. Maybe jail time for their decision makers will set an example. Some blue collar criminal can rob a bank and spend 30 years in jail but white collar guys can steal billions (Wall Street hello!) and they give them a bonus.

Posted by BigStick | Report as abusive
 

There are many U.S. corporations who do horrible things, and I right there with the leftists to challenge them. Consider this, BP was first British Petroleum, once they realized that 1. they didn’t control very much oil in the first place, and 2. oil pollutes a lot and is starting to piss some people off; they then changed their name to Beyond Petroleum. This is just an example of deception by a corporation. I gladly support corporations which actually help the communities they exist in. Ben and Jerry’s and Starbucks are both examples of good corporations trying to improve their states they work from and try to improve the sources they get their product from. I won’t say anything about BP because I don’t know that much, besides this spill. This spill has all ready put hundreds of thousands out of work, so consider that when you talk “anti-business”, I would say BP tops the charts for putting people out of business. Well except for U.S. economy of course.

Posted by AHHHhh642 | Report as abusive
 

Every time BIG OIL does something wrong grossly ungrateful Americans cry the blues. What a joke against the most efficient industry ever.
American politicians or actors drape themselves in the flag covered with someone
else’s blood or oil. Our politicians are dung: they relish any news of disaster which draws attention any from their own budgetary foolishness. Hooray for the PRC Central Bank for buying our debt year after year.
Louisiana has not recovered from hurricane Katrina. No one cared, but now a new deep pocket can be sued for American “QUEEN FOR A DAY” litigants. Bums are looking for something for nothing around the BIG EASY. The major media howl.

The world is not on fire. Wildlife will survive. Life goes on: BP will pay real claims!!!

Posted by AmericanRealist | Report as abusive
 

@gmmj people are slowly starting to understand the need for balance in government… having one side with to much power leads to disasters. What is needed is a strong leader with an eye on reality but a hope for something greater. We need another Roosevelt

Posted by Cueil | Report as abusive
 

Although I can agree with the commentator and some comments, it seems we may be losing sight on what is most important in this disaster—the people and the impact on this already fragile region. I believe this is where this country and world has gone wrong. Somewhere in this evolution of progress, the nation as a whole and its well-being has been factored out. We have lost our way and have in fact evolved into a “highest bidder” commodity. Face the “facts” BP has done it again. It has screwed up to the highest possible cost–the loss of lives! That is the ultimate price when you offer it willingly…but BP didn’t ask for volunteers, either from their employees and their families or the residents of Louisiana.

Posted by rhondub03 | Report as abusive
 

Tony Hayward STEP DOWN NOW!

Posted by arjay1 | Report as abusive
 

I am concerned that BP is getting a kicking at the moment – surely politically motivated?
If you consider that Transocean were doing the drilling -US coy right?
Halliburton involved in the whole exercise as expert consultants – US right/Cheney to boot?
Then BR has 65% and a US coy and Jap (Mitsui) have 35%. Add insurance companies on the hook. Does Obama have an aim (Exxon takeover?) when he starts to castigate BP as British Petroleum to disassociate the US connections?
I personally reckon one stocks up for the bargain of the century in buying their shares. Obama can surely be largely ignored for trying to meddle when he has not a clue.
Disgusted at your President for playing to the crowd

Posted by john.jacobs | Report as abusive
 

[...] most likely fate for BP at this point isn’t death but rather takeover. There’s been a lot of speculation along those lines, and with BP’s leadership looking [...]

 

[...] most likely fate for BP at this point isn’t death but rather takeover. There’s been a lot of speculation along those lines, and with BP’s leadership looking [...]

 

[...] most likely fate for BP at this point isn’t death but rather takeover. There’s been a lot of speculation along those lines, and with BP’s leadership looking [...]

 

[...] most likely fate for BP at this point isn’t death but rather takeover. There’s been a lot of speculation along those lines, and with BP’s leadership looking [...]

 

[...] most likely fate for BP at this point isn’t death but rather takeover. There’s been a lot of speculation along those lines, and with BP’s leadership looking [...]

 

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