BFW 04/21 01:58 BP Readies Defenses as Oil Industry Responds to Shell’s BG Raid
BP Readies Defenses as Oil Industry Responds to Shell’s BG Raid
2015-04-20 23:01:00.5 GMT
By Rakteem Katakey, Matthew Campbell and Dinesh Nair
(Bloomberg) -- As the oil industry takes stock of Royal
Dutch Shell Plc’s $70 billion move for BG Group Plc, one company
has more to chew on than most.
BP Plc, the U.K.’s most storied oil producer and prime
mover in previous rounds of consolidation, is now thinking what
was once unthinkable: that it could be next in the cross-hairs.
BP executives are concerned the company is vulnerable to an
opportunistic bid, according to people familiar with the
situation. In response, they’ve stepped up internal reviews of
takeover scenarios and war-gamed defense strategies with
advisers from firms including Morgan Stanley, said the people,
all of whom asked not to be identified discussing a private
matter. Exxon Mobil Corp. and Chevron Corp., the two largest
U.S. producers, are seen as the only realistic predators.
While some in the industry believe a move for the British
company remains unlikely because of still-unknown legal
liabilities from the 2010 Gulf of Mexico oil disaster, there’s
at least one good reason for Chief Executive Officer Bob Dudley
to be paranoid. Before ruling themselves out by going for BG,
Shell took a hard look at buying BP, one of the people said.
“As a matter of good practice, all companies have possible
defense arrangements in place,” BP spokesman David Nicholas
said in an e-mail. “BP has made no changes to our long-standing
arrangements in response to recent moves in the market.”
Representatives for Exxon, Chevron, Shell and Morgan
Stanley declined to comment.
“Exxon saw Shell do a deal and they would certainly be
looking around, it’s the same for Chevron,” said Christopher
Geier, partner in charge at Sikich Investment Banking in
Chicago. “From a value perspective, it’s possible BP could be
ripe for a takeover.”
Relative Decline
That BP’s independence is even up for discussion shows the
relative decline of a company that pioneered exports from the
Middle East, helped start Alaska’s oil industry and led the
exploration of the North Sea. In the 1990s, its acquisition of
U.S. giant Amoco Corp. forced the rest of the industry to react.
As recently as 2010, BP had the same market capitalization
as Shell and produced more oil and gas. Today, even before the
BG deal is completed, BP’s value at $131 billion is two-thirds
of Shell’s. It’s even further behind Exxon, the world’s most
valuable oil company at $368 billion.
There’s one clear reason, of course: the Gulf oil spill
that left BP facing costs that may eventually exceed $40
billion, forcing it to shrink to survive. Since taking over in
the months following the spill, Dudley’s sold about a third of
the company’s assets and production has fallen from close to 4
million barrels a day in 2010 to a little more than 3 million.
Some have applauded the creation of a leaner, more profit-
focused company, but BP can no longer claim to be in the first
rank of global oil and gas producers.
Deep Water
The slimmed-down BP still has plenty to attract potential
acquirers, including strong deep-water prospects in Angola and
the Gulf of Mexico, a refining business that’s outperformed
peers, and an industry-leading trading outfit.
Dudley has few options to make the company harder to buy.
The traditional route is a defensive acquisition, a course of
action the company is considering, the people familiar with the
matter said.
However, any deal large enough to dissuade potential buyers
would also represent a significant departure from Dudley’s
avowed focus on keeping BP to a manageable size.
A fresh buyback of shares has also been suggested by
advisers, the people said. The company returned $8 billion to
investors last year after selling its stake in a Russian
business.
Dudley declined to comment specifically on BP’s plans, or
on his views of its vulnerability.
Change Strategy
“On the industry as a whole, if oil prices stay down,
we’ll probably see more M&A,” he said after the company’s April
16 shareholder meeting in London. “If it stays lower for
longer, the dynamics will change and companies will change their
strategy.”
Ironically, factors that have contributed to BP’s
difficulties could also keep it from being bought. The legal
liabilities stemming from the Gulf spill are still open-ended as
the company remains embroiled in U.S. litigation.
A U.S. judge is expected to rule on the size of federal
fines BP must pay later this year, which could total $13
billion, and the company is being sued by several states. In any
event, appeals are likely to keep the company’s lawyers busy for
years.
Russia is another question mark. After a complex 2012 deal
to sell its stake in Russian venture TNK-BP, BP owns 20 percent
of OAO Rosneft -- the Kremlin-controlled oil producer that’s
subject to U.S. and European Union sanctions. While in the long
run that brings a prime position in the world’s largest energy-
producing country, there are plenty of near-term risks.
Enterprise Value
Despite those pitfalls, BP’s attraction for potential
buyers isn’t hard to quantify. The London-based company has the
lowest enterprise value relative to the volume of oil and gas
production of any of the six largest U.S. and European energy
companies. Based on the current share price, its oil and gas
reserves are valued at $7.49 a barrel, almost half Exxon’s.
Discussions of likely acquirers for BP tend to return to
the U.S. firm. Exxon, the world’s largest private oil producer
is on the hunt for acquisitions in order to compensate for
difficulties expanding its own production, people familiar with
the situation have said. With almost no debt and more than $200
billion in shares repurchased over the past 16 years, Exxon has
the financial power for almost any conceivable transaction.
“The issue may not be that BP is weak, but that Exxon is
that much stronger,” said Scott Cockerham, a managing director
in Houston at energy advisory firm Conway MacKenzie. “If Exxon
thinks BP is a good fit, it can act on that assumption.”
Hurdles Remain
Nonetheless, plenty of hurdles remain to an Exxon offer.
The Texan company’s famously buttoned-down engineers have long
been privately disdainful of BP’s internal practices and safety
record, making a cultural fit difficult.
An acquisition by Exxon could also make the combined
company too big, attracting the attention of antitrust
regulators around the world. And the U.K. government might
object to the sale of a formerly state-owned company -- until
the 1990s known as British Petroleum -- to an American concern.
Whether Exxon makes a play or not, BP is adapting to a
world where Shell’s deal has upended the industry’s expectations
on mergers and acquisitions.
“All players are looking at opportunities,” Eldar Saetre,
the CEO of Norway’s largest oil producer, Statoil ASA, said last
week. “There could be more deals.”
For Related News and Information:
Statoil Chief Say More Oil Deals Likely After Shell-BG Merger
Shell-BG Deal Puts Pressure on Big Oil to Consolidate Again
Top Oil Stories: OTOP<GO>
--With assistance from Javier Blas and Ruth David in London and
Matthew Monks in New York.
To contact the reporters on this story:
Rakteem Katakey in London at +44-20-3525-3813 or
rkatakey@bloomberg.net;
Matthew Campbell in London at +44-20-3525-8684 or
mcampbell39@bloomberg.net;
Dinesh Nair in London at +44-20-3525-3212 or
dnair5@bloomberg.net
To contact the editors responsible for this story:
Will Kennedy at +44-20-3525-3603 or
wkennedy3@bloomberg.net
Elizabeth Fournier
2015-04-20 23:01:00.5 GMT
By Rakteem Katakey, Matthew Campbell and Dinesh Nair
(Bloomberg) -- As the oil industry takes stock of Royal
Dutch Shell Plc’s $70 billion move for BG Group Plc, one company
has more to chew on than most.
BP Plc, the U.K.’s most storied oil producer and prime
mover in previous rounds of consolidation, is now thinking what
was once unthinkable: that it could be next in the cross-hairs.
BP executives are concerned the company is vulnerable to an
opportunistic bid, according to people familiar with the
situation. In response, they’ve stepped up internal reviews of
takeover scenarios and war-gamed defense strategies with
advisers from firms including Morgan Stanley, said the people,
all of whom asked not to be identified discussing a private
matter. Exxon Mobil Corp. and Chevron Corp., the two largest
U.S. producers, are seen as the only realistic predators.
While some in the industry believe a move for the British
company remains unlikely because of still-unknown legal
liabilities from the 2010 Gulf of Mexico oil disaster, there’s
at least one good reason for Chief Executive Officer Bob Dudley
to be paranoid. Before ruling themselves out by going for BG,
Shell took a hard look at buying BP, one of the people said.
“As a matter of good practice, all companies have possible
defense arrangements in place,” BP spokesman David Nicholas
said in an e-mail. “BP has made no changes to our long-standing
arrangements in response to recent moves in the market.”
Representatives for Exxon, Chevron, Shell and Morgan
Stanley declined to comment.
“Exxon saw Shell do a deal and they would certainly be
looking around, it’s the same for Chevron,” said Christopher
Geier, partner in charge at Sikich Investment Banking in
Chicago. “From a value perspective, it’s possible BP could be
ripe for a takeover.”
Relative Decline
That BP’s independence is even up for discussion shows the
relative decline of a company that pioneered exports from the
Middle East, helped start Alaska’s oil industry and led the
exploration of the North Sea. In the 1990s, its acquisition of
U.S. giant Amoco Corp. forced the rest of the industry to react.
As recently as 2010, BP had the same market capitalization
as Shell and produced more oil and gas. Today, even before the
BG deal is completed, BP’s value at $131 billion is two-thirds
of Shell’s. It’s even further behind Exxon, the world’s most
valuable oil company at $368 billion.
There’s one clear reason, of course: the Gulf oil spill
that left BP facing costs that may eventually exceed $40
billion, forcing it to shrink to survive. Since taking over in
the months following the spill, Dudley’s sold about a third of
the company’s assets and production has fallen from close to 4
million barrels a day in 2010 to a little more than 3 million.
Some have applauded the creation of a leaner, more profit-
focused company, but BP can no longer claim to be in the first
rank of global oil and gas producers.
Deep Water
The slimmed-down BP still has plenty to attract potential
acquirers, including strong deep-water prospects in Angola and
the Gulf of Mexico, a refining business that’s outperformed
peers, and an industry-leading trading outfit.
Dudley has few options to make the company harder to buy.
The traditional route is a defensive acquisition, a course of
action the company is considering, the people familiar with the
matter said.
However, any deal large enough to dissuade potential buyers
would also represent a significant departure from Dudley’s
avowed focus on keeping BP to a manageable size.
A fresh buyback of shares has also been suggested by
advisers, the people said. The company returned $8 billion to
investors last year after selling its stake in a Russian
business.
Dudley declined to comment specifically on BP’s plans, or
on his views of its vulnerability.
Change Strategy
“On the industry as a whole, if oil prices stay down,
we’ll probably see more M&A,” he said after the company’s April
16 shareholder meeting in London. “If it stays lower for
longer, the dynamics will change and companies will change their
strategy.”
Ironically, factors that have contributed to BP’s
difficulties could also keep it from being bought. The legal
liabilities stemming from the Gulf spill are still open-ended as
the company remains embroiled in U.S. litigation.
A U.S. judge is expected to rule on the size of federal
fines BP must pay later this year, which could total $13
billion, and the company is being sued by several states. In any
event, appeals are likely to keep the company’s lawyers busy for
years.
Russia is another question mark. After a complex 2012 deal
to sell its stake in Russian venture TNK-BP, BP owns 20 percent
of OAO Rosneft -- the Kremlin-controlled oil producer that’s
subject to U.S. and European Union sanctions. While in the long
run that brings a prime position in the world’s largest energy-
producing country, there are plenty of near-term risks.
Enterprise Value
Despite those pitfalls, BP’s attraction for potential
buyers isn’t hard to quantify. The London-based company has the
lowest enterprise value relative to the volume of oil and gas
production of any of the six largest U.S. and European energy
companies. Based on the current share price, its oil and gas
reserves are valued at $7.49 a barrel, almost half Exxon’s.
Discussions of likely acquirers for BP tend to return to
the U.S. firm. Exxon, the world’s largest private oil producer
is on the hunt for acquisitions in order to compensate for
difficulties expanding its own production, people familiar with
the situation have said. With almost no debt and more than $200
billion in shares repurchased over the past 16 years, Exxon has
the financial power for almost any conceivable transaction.
“The issue may not be that BP is weak, but that Exxon is
that much stronger,” said Scott Cockerham, a managing director
in Houston at energy advisory firm Conway MacKenzie. “If Exxon
thinks BP is a good fit, it can act on that assumption.”
Hurdles Remain
Nonetheless, plenty of hurdles remain to an Exxon offer.
The Texan company’s famously buttoned-down engineers have long
been privately disdainful of BP’s internal practices and safety
record, making a cultural fit difficult.
An acquisition by Exxon could also make the combined
company too big, attracting the attention of antitrust
regulators around the world. And the U.K. government might
object to the sale of a formerly state-owned company -- until
the 1990s known as British Petroleum -- to an American concern.
Whether Exxon makes a play or not, BP is adapting to a
world where Shell’s deal has upended the industry’s expectations
on mergers and acquisitions.
“All players are looking at opportunities,” Eldar Saetre,
the CEO of Norway’s largest oil producer, Statoil ASA, said last
week. “There could be more deals.”
For Related News and Information:
Statoil Chief Say More Oil Deals Likely After Shell-BG Merger
Shell-BG Deal Puts Pressure on Big Oil to Consolidate Again
Top Oil Stories: OTOP<GO>
--With assistance from Javier Blas and Ruth David in London and
Matthew Monks in New York.
To contact the reporters on this story:
Rakteem Katakey in London at +44-20-3525-3813 or
rkatakey@bloomberg.net;
Matthew Campbell in London at +44-20-3525-8684 or
mcampbell39@bloomberg.net;
Dinesh Nair in London at +44-20-3525-3212 or
dnair5@bloomberg.net
To contact the editors responsible for this story:
Will Kennedy at +44-20-3525-3603 or
wkennedy3@bloomberg.net
Elizabeth Fournier