BP’s Gulf fiasco makes it vulnerable to a takeover
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.