It’s been five years since the Deepwater Horizon disaster — arguably one of the worst oil spills in recent history. The resulting legal battle for BP plc (ADR) (NYSE:BP) has been a pretty tough fight. And yet, BP could be in for a much bigger battle over the next few months.
Namely, a fight for its own independence.
Ever since the Deepwater disaster back in 2010, struggling BP has been called a target for merger or buyout — even more so as it continued to shed assets and slim down to pay for its mounting legal bills. And now with rival integrated energy giant Royal Dutch Shell plc (ADR) (NYSE:RDS.A) paying some major cash for natural gas producer BG Group, BP’s days as an independent concern could be numbered.
And recent moves suggest that those days could be in the single digits.
For investors, there hasn’t been much to smile about in BP stock shares since the disaster. But that buyout potential could be change that.
BP Prepares For ‘War’
Back in the 1990s, BP’s purchase of Amoco set in motion the wave of mega-mergers and basically created the major integrated energy firm. Now, BP could be the one being acquired.
As oil prices have cratered, it’s created an environment that is ripe for consolidation and rising buyout activity. The general widespread idea was that the majors would use this time to take out smaller, under-capitalized shale producers with quality assets. The RDS/BG $70 billion deal basically threw that idea out the window. Analysts at Jefferies say that Shell will become the top dog in the sector by 2018.
That put everyone else on notice — especially BP.
Since the Gulf of Mexico oil spill, BP stock has lost around 33% of its value, although it’s rallied by 14% so far this year. That has several executives at the major oil producer vehemently denying rumors and breaking out takeover defense strategies behind closed doors.
There are plenty of reasons to be concerned about an unsolicited buyout offer. For one thing, Shell basically came out and said it was considering BP before it bought BG instead.
BP is just the perfect size to gobble up. Since the spill, CEO Bob Dudley has shrunk the former integrated giant considerably to help pay for the mounting legal woes. That’s carved everything from refineries and processing assets to oil and natural gas fields from BP’s asset base. That process continues today as the firm is looking to get about $2 billion from its midstream portfolio.
All in all, Dudley has sold off about a third of all of BP’s assets. That’s made it a smaller — and perhaps, easier to swallow — package.
What’s left is still of good quality. BP still produces about 3 million barrels of oil equivalent (BoE) each day from its reserves. That includes assets in the long-lived fields in the Gulf of Mexico, Europe’s North Sea and Alaska. That provides BP with a highly desirable large oil cut.
Likewise, its downstream refining and retail portfolio is quite strong and is one of the best performing in the sector.
Finally, BP’s 20% ownership in Russian natural gas driller Rosneft Oil Co (OTCMKTS:RNFTF) could be a big win for a major oil producer looking to get into the emerging market.
Those are just the kind of assets and production that can really make a dent in and turn back the tide of another major’s declining production issues. And with $130 billion market cap, BP is certainly within striking distance of a select group of integrated and state-owned energy giants.
Who Could Buy BP?
And who could exactly snag BP for a song?
Exxon Mobil Corporation (NYSE:XOM), for one. With Shell quickly creeping to take over XOM’s position, Exxon could be prompted to “put a tiger” in its tank and buy out someone big — and BP could be it.
A BP/XOM deal certainly makes sense. Those reserves would help bolster Exxon’s declining oil production. And Exxon already has major deal in place with Rosneft. The ownership stake could provide it additional leverage in Russia and would certainly have the blessing of Russia’s President Vladimir Putin.
For BP’s operations, Exxon could be the “safety police” it needs. Since the Exxon Valdez accident 1989, XOM has become the safety leader in the energy sector. BP painfully needs a lesson in how to improve its safety culture.
And as for buying BP, XOM has the firepower. Exxon recently raised $8 billion in new bonds, but the crown jewel could be the $200 billion in treasury stock it’s holding, courtesy of its record buyback programs. That gives it the ability to do an all-stock deal for BP.
And since XOM shares are overvalued relative to BP ones, that gives Exxon an edge. So it’s almost certain that Rex Tillerson and the crew at Exxon are poring over BP’s prospects.
Chevron Corporation (NYSE:CVX) could make a run at BP. The firm is now a distant third — behind RDS/BG and XOM — when it comes to the super majors. By buying BP, CVX would instantly propel it to this new tier of reeeeeeally elite energy firms.
China’s PetroChina Company Limited (ADR) (NYSE:PTR) is flush with cash from Beijing. PTR and its other state-owned kin have been big buyers of assets in North America over the last few years.
Perhaps Eldar Saetre, CEO of Norway’s Statoil ASA (NYSE:STO) said it best when he said “All players are looking at opportunities.”
The Bottom Line
The Shell buyout of BG completely changed the game in the energy industry and BP could be in the crosshairs of another super major. While it’s not enough to buy shares today, it could be the much-needed closure that long-term suffering shareholders need.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
