BP has changed a lot in the past decade. However, unless the price of oil stops falling, its giant troubles could make it a takeover target.
To receive adequate returns, investors need to be very patient. For BP’s investors, patience is obviously a noble virtue. They love the company because it pays generous and reliable returns. The company’s quarterly returns, which was released on February 2015 is, however, not as sexy as the investors expected. A 5.8 percent dividend yield means that the British third largest company’s shares have fallen by a fifth over 10 years. When compared to the performance of the broader market, this value implies that the return received by BP’s shareholders for that period is slightly negative. The main cause of this meagre return is evident: Due to the Deepwater Horizon disaster which occurred in April 2010 in the Gulf of Mexico, which cost 11 lives, BP was forced to spend a whopping $43 billion in legal bills, compensation, fines and cleanup.1
BP has shed a lot of weight since then. As it continues to fight (and mainly lose) lawsuits and appeals, the company has sold more than $40 billion of assets, and had cut a third of its size. The sudden collapse of oil prices is adding a new edge to its problems. The company’s business plans, until recently, was based on an oil price of $100 per barrel. With the dramatic fall in oil prices, it announced a $1 billion restructuring plans to its shareholders last December. In this restructuring plan, the company reassured its jittery investors that even though its investment plans assumed an oil price of $80 per barrel, it has a fall back level of $60 per barrel.2 At the time of BP’s announcement, the oil price was $65 per barrel. Now it is below $62 per barrel.3 So the company is making plans for another job cuts.
It is worth noting that BP has annual budget of $20 billion-plus.4 This made its capital budget to be less affordable. In addition, the company’s generous dividend, which it regards as a top priority, means that it will bleed more cash which, understandably won’t make its management excited. Hence both the company’s private and institutional investors won’t be surprised if it pays its next dividend in new shares.
With the current financial state of BP, it won’t be a surprise if one of its rivals seeks to capitalize on its weakness and place a bid for the company. But the list of possible buyers will be short given that BP has a large market capitalization of $107 billion as of January 2015. The word on the street is that the possible buyers could be Exxon (with market capitalization of $380 billion) and Shell (with market capitalization of $197 billion). Chevron(with market capitalization of $196 billion) can also be a possible suitor except that the company seems to be more interested in merging with BP rather than outright purchase.5 Some state oil and gas firms, such as those of Saudi Arabia and Kuwait, were not in a shopping mood. Otherwise they are big enough to afford BP.
BP has as much as 20 percent stake in Rosneft, the largest and most connected oil company in Russia. This makes BP an attractive takeover target. Though very big and well connected to the Russian establishment, Rosneft is currently in big trouble. It is heavily indebted and had to be bailed out in December 2014 by the Russian government. It is also cut off from the western capital markets by sanctions.6 But given that Russian’s oil and gas reserves are hard to ignore, Rosneft has long-term potentials. It is important to state here that Exxon, an oil company with deep ties with Russia, was forced by sanctions to cancel its Arctic drilling projects with Rosneft. So if the company can buy BP, it will naturally create a smooth avenue to get back in. And only a tough and brave boss like Exxon’s Rex Tillerson can make such a strategic move.
It can also be argued that that BP’s plight may not be the strongest reason for a take-over bid on the company. The global oil industry is facing a general gloom. For instance, over the past 10 years the S & P Global Oil Index is up just 2.6 percent7 – a value that indicates that it has performed only marginally worse than BP during the same period. All the other big oil and energy companies are not having good times either: even before the oil price fall, they were all wrestling with rising costs and falling reserves. Now, the effects of the falling oil prices make their situations more challenging, which also makes merging attractive since it will be a nice opportunity to cut costs and save money. At this time, the price of buying another oil company may be cheap given what is currently happening in the industry. BP, however, is not best placed to go shopping itself. But the company is considered fit, lean, and cheap. So it could naturally be on another oil company’s shopping list.
Ideally, BP will like to stay independent. The company’s bosses may argue that they have done a good job since 2010. At least since that year, they succeeded in managing a period characterized by bloat, corner-cutting on safety, and excessive ambition. But some of the big problems facing the company since 2010 has not gone away. Besides, BP is Britain’s former imperial oil company. Hence its close ties to the British establishment is very strong. This means that any interested buyer would have to devise a workable plan to surmount these problems and obstacles. Also 2015 is an election year in Britain. So naturally, if BP is sold to an American buyer (such as Exxon), the transaction can start a political row in Britain.8
The big question, of course, is whether Exxon would be able to solve BP’s remaining American lawsuits should it decides to buy the company. Note that the state of Louisiana is the place where BP has its biggest headache. And it is not really a surprise that the company faces more challenges in that state. Louisiana is a state that don’t have much love for outsiders, regardless of where such outsiders came from – whether they are foreigners or just from out of state. President Obama once referred to BP as “British Petroleum.”9 Soon after he made that comment, many legal wheels were turned that served as openings for the hunting for BP’s head. So to buy BP, a company like Exxon must be prepared to inherit all the class action litigations brought against the company since 2010. But given that boards are usually leery about buying a company embroiled in lawsuits, Exxon may have a second thought about making a move on BP.
It should be observed here that BP was once an old partner and rival to Shell. However, the idea of merging with BP is not an attractive option to Shell. At the time when BP was one of the top dog in the oil industry, its former executive, Lord Brown, considered a merger between the two companies. A lot had changed since then. At present, Shell has a solid balance sheet, which makes it a stronger company. Besides, Shell has more attractive synergies and cost saving options to capitalize on. Furthermore, Shell is not known for big hostile bids. The Anglo-Dutch company has a lot on its plate. It made big bets on gas and on Alaskan drilling projects – projects that are not really going well as its management anticipated. This era of tumbling oil prices is also not a good time for Shell, which is trying to sell off some of its assets. The company was also forced by the crisis in the industry to scrap its huge petrochemical project in Qatar last month.10 BP was luckier: it sold assets when oil prices were high.
Another factor that makes BP less attractive to Shell is its culture. Melding together the two companies’ culture will be an uphill task, for one important reason: BP is known for its imperial ways, which fosters an organizational climate in which employees feel nervous about bringing bad news to the boss. Shell, in contrast, is an engineering-driven company which is more flat and collaborative. Hence merging with BP might trigger anti-monopoly investigation which may require complicated and risky untangling of its downstream assets – something which Shell’s management is not prepared to do in this hard times.
The bottom line is that the risks and costs of buying BP is high. So potential predators would naturally think twice about having a go right now, unless they are willing to absorb these costs and risks. Potential predators will be better off buying many other firms that would not come with BP’s baggage. But all bets will be off if oil prices stays low or if BP’s condition worsen for other reasons. On the positive side, BP has changed a lot in the past decade. However, that will not be enough to take the company off the life support: it will have to do even more now in order to guarantee its independence.
1The Economist (2015): BP – Blood in the Water. Retrieved February 16, 2015 from http://www.economist.com/news/business/21639504-oil-giants-troubles-could-make-it-takeover-target-especially-if-price-crude-keeps
3 Bloomberg Business (2015): Energy & Oil Prices. Retrieved February 16, 2015 from http://www.bloomberg.com/energy/
4 BP Trims Capital Budget by $4-6 Billion. (2015, February 3). Oil & Gas Journal. Retrieved February 20, 2015 from http://www.ogj.com/articles/2015/02/bp-trims-capital-budget-by-4-6-billion.html
5 The Economist (2015), op. cit., p. 59. Retrieved February 16, 2015 from http://www.economist.com/news/business/21639504-oil-giants-troubles-could-make-it-takeover-target-especially-if-price-crude-keeps
6 Guriev S. (2014): State Firm Bailouts Are Killing Russian Ruble. The Moscow Times. Retrieved February 20, 2015 from http://www.themoscowtimes.com/opinion/article/even-russians-are-running-from-the-ruble/513599.html
7 The Economist (2015), op. cit., p. 59. Retrieved February 16, 2015 from http://www.economist.com/news/business/21639504-oil-giants-troubles-could-make-it-takeover-target-especially-if-price-crude-keeps
9 BP Oil Spill: Obama Comments “Not Anti-British.”(2010, June 13). BBC News. Retrieved February 20, 2015 from http://www.bbc.co.uk/news/10303619
10 Sergie M., Kayakiran F. (2015): Qatar, Shell Scrap $6.5 Billion Project After Oil’s Drop. Bloomberg Business. Retrieved February 20, 2015 from http://www.bloomberg.com/news/articles/2015-01-14/qatar-shell-scrap-65-billion-project-amid-oilprice-collapse