British tabloid ‘The Sun’ reports today that Exxon Mobil Corp. (XOM) has received permission from the Obama Administration to make a bid worth about $150 billion for BP plc (BP). Other front page headlines from today’s ‘Sun’ include “I’m a Teacher and a Porn Star…What’s the Problem?”
Another British newspaper, the ‘Sunday Times’, reports that BP is talking to US independent Apache Corp. (APA) about a sale of BP assets including a portion of BP’s Alaskan North Slope operations. Such a sale would help BP raise the cash it will certainly need to pay for the damages for its leaking Macondo well in the Gulf of Mexico. The company said that it’s costs so far have risen to $3.5 billion.
Other reported schemes have BP raising cash by borrowing, making a secondary stock offering, or seeking loans or equity from private investors. BP officials have reportedly talked with investors from the Middle East about just such an investment.
First off, the rumored buyout by Exxon is almost certainly not going to happen. Why in the world would Exxon pay that kind of money to purchase liabilities of an as-yet unrealized scope? What BP has had to pay so far, combined with the $20 billion fund the company has agreed to set up, could be just a fraction of the final tab. The upside of buying BP is fairly well-known; the downside is not, and it is potentially vast.
A potential sale of assets to Apache or some other E&P company is not as unlikely. BP’s problem is that even its huge assets aren’t comforting enough to bankers to generate the amount of cash the company is likely to need. Selling more stock, after cutting the company’s dividend, is not likely to sit well with investors. There are few private investors with enough capital to do BP any good, and there’s only one foreign government that could help–China.
But the Chinese remember the hostile reception they got when they tried to buy Unocal, and there’s no reason to think that sentiment in the US Congress for a Chinese purchase of North Slope assets is any more favorable today than it was in 2005.
A sale to Apache, while possible, is unlikely. Apache paid $4 billion for Mariner Energy and its Gulf of Mexico assets just 2 weeks before the Deepwater Horizon blew up and sank. Apache’s strategy had been to pick up deepwater Gulf assets and wring out more crude using the latest technology. Given what’s happened since the Mariner purchase, Apache might be re-thinking its strategy.
As odd as it may sound, some of BP’s assets, while valuable, are not particularly attractive. The North Slope is producing less crude each year, and the Gulf is poisonous now. BP has effectively been hamstrung in Russia, and the company’s North Sea properties are also falling off.
If BP can arrange an asset sale, one of the potential buyers will have to swallow its fears, close its eyes, and pull the trigger. It might be better to wait for the distress sale when BP files for bankruptcy. Just sayin’.