BP plc (NYSE: BP) may be back in play. That is, at least, what a report from The Daily Mail says. The FT points out that claims against the UK-based oil giant for the Gulf spill have not tapered off, which may cause the company to raise new capital.
The Mail believes that the probable buyer of BP is Royal Dutch Shell (NYSE: RDS-A). The Hague-based firm probably has the financial ability to make an offer. The capital markets are awash with liquidity and the largest companies have access to money at historically low rates.
The troubles with an approach to BP are two-fold. The first is that any offer is bound to draw others. There is no reason that Exxon Mobil (NYSE: XOM) or Chevron (NYSE: CVX) could not raise money for a bid. Any rush to buy BP would drive its share price up to irrationally high levels, as is often the case when bidding wars emerge.
The other problem is that the legal difficulties BP faces could still be nearly endless. The $20 billion fund it has established for claims against it due to the Deepwater Horizon spill may be adequate to cover all the liabilities there. The US government, however, has not been satisfied. No one has said what kind of fines might be levied against BP, but Washington is not likely to let the matter go entirely.
Buyers could argue that BP is a very different company than it was a year ago. It has sold $3.5 billion in bonds. Apache paid $7 billion for BP assets in Canada and Egypt. It has also sold part of its business in Colombia.
There is also the rising price of oil. A number of analysts believe crude will trade above $100 soon. Crude prices at that level usually favor oil company profits. BP’s earnings may soon recover.
A buyout of BP would be based on the analysis of what the acquirer could do to save money in a consolidation. That is almost always an excuse for offers made by one firm for another when both are in the same sector. Shell or some other multinational oil company may cut costs at the executive and administration levels. It is much harder to see how much can be saved by combining exploration and refining operations around the world.
BP, as its board has found out as its sells assets, is probably worth more in pieces. Several sets of offers all meant to acquire BP are just as likely to cause a break-up of a firm – which may still have more trouble than it can handle.
Douglas A. McIntyre