BP could be ripe for takeover

Posted July 1, 2010 at 4:20 p.m.

From CNN | BP’s stock price has fallen far enough for the oil company to become an attractive takeover target for its biggest rivals, according to industry analysts.

BP’s stock finished at $28.88 Wednesday, a plunge of more than 50% from its close of $60.09 on April 19, the day before its leased oil rig, the Deepwater Horizon, exploded and sank in the Gulf of Mexico, killing 11 workers. On Thursday, shares were up more than 3%.

Fred Lucas of JPMorgan believes that investors have overdone it in dumping the stock, cheapening it to an attractive value for buyers – meaning potential parent companies, not just individual investors.

“In theory, either Exxon Mobil or RD Shell could consider a bid for BP,” wrote Lucas in a note to investors. “We focus on these two names because they have similar business models and similar global asset structures. They also bear the lowest political risk to a potential combination with BP.”

Lucas said that his idea of a proposed takeover of BP was “prompted by the gap between the current market value of BP and the intrinsic value that we see in BP.”

Another oil industry analyst, Douglas Youngson of Arbuthnot Securities, told CNNMoney last month that if BP’s stock dropped below $30 a share, it would become an attractive takeover target.

“If the share price continues to fall, other companies may see this for the bargain it will be,” said Youngson on June 2, when BP’s stock closed at $37.66.

Of the various big players in the oil industry — including Gazprom and PetroChina — Lucas of JPMorgan believes that ExxonMobil is in the best position to take over battered BP.

He wrote that Exxon Mobil “has the largest rating advantage and strongest balance sheet,” providing it with enough cash to handle the deal.

“Exxon Mobil has also proven its ability to integrate a very large transaction successfully — its merger with Mobil was a resounding success,” added Lucas. “RD Shell has no large-scale merger integration experience.”

Gazprom wouldn’t be a contender because of a “low stock market rating,” he said, while PetroChina “would encounter major political barriers given its controlling shareholder – the Chinese government.”

Lucas considers the economics of a potential BP merger to be “compelling, and we question why the market is not factoring in the possibility of it ever happening.”

He added that the “markets have become too focused on the downside risks to BP related to potential Macondo liabilities.”

Since April 20, BP’s oil spill has continued unabated from the ruptured Macondo well beneath the surface of the ocean, hemorrhaging up to 60,000 barrels a day into the Gulf and fouling the coastline of neighboring states.

As a result, BP has been purging itself of cash to try and fix the environmental and economic aftermath. The company said it has paid out $2.65 billion for the clean-up, and another $130 million on 41,000 claims from workers and business owners who lost their livelihoods in the wake of the spill. More than 80,000 claims have been submitted so far. Bowing to pressure from the U.S. government, BP has put $20 billion in escrow to cover damages.

Lucas figures that the leak will stop sometime in July, meaning a finite cap to the liabilities. So this might be a good time for Exxon Mobil to swoop in, especially since the oil giant has had its own experiences with catastrophic oil spills.

Before BP’s environmental disaster in the Gulf, Exxon had the dubious distinction of causing the nation’s worst oil spill, when the Exxon Valdez oil tanker ran aground off the coast of Alaska in 1989.

“In many respects, an accurate valuation of BP today depends less on a valuation of its assets, but more on an accurate value of its potential liabilities,” wrote Lucas. “Who knows better how to price potential clean-up costs and associated civil claims than Exxon Mobil?”

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One comment:

  1. jack (me) July 1, 2010 at 4:48 pm

    However, this could be like B o A taking over Countrywide, but without the FDIC assistance. What company wants to take over another with huge unliquidated liabilities, and potential exposure to thousands of lawsuits, even if the stock price is cheap? In fact, that is why the stock price is cheap.