BP Readies Defenses as Oil Industry Responds to Shell-BG Deal

(Bloomberg) — As the oil {industry} takes inventory of Royal Dutch Shell Plc’s $70 billion transfer for BG Group Plc, one firm has extra to chew on than most.

BP Plc, the U.Ok.’s most storied oil producer and prime mover in earlier rounds of consolidation, is now considering what was as soon as unthinkable: that it might be subsequent within the cross-hairs.

BP executives are involved the corporate is weak to an opportunistic bid, in line with folks acquainted with the state of affairs. In response, they’ve stepped up inner opinions of takeover eventualities and war-gamed protection methods with advisers from corporations together with Morgan Stanley, stated the folks, all of whom requested to not be recognized discussing a personal matter. Exxon Mobil Corp. and Chevron Corp., the 2 largest U.S. producers, are seen as the one real looking predators.

While some within the {industry} imagine a transfer for the British firm stays unlikely due to still-unknown authorized liabilities from the 2010 Gulf of Mexico oil catastrophe, there’s at the least one good motive for Chief Executive Officer Bob Dudley to be paranoid. Before ruling themselves out by going for BG, Shell took a tough take a look at shopping for BP, one of many folks stated.

“As a matter of good practice, all companies have possible defense arrangements in place,” BP spokesman David Nicholas stated 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 remark.

“Exxon saw Shell do a deal and they would certainly be looking around, it’s the same for Chevron,” stated Christopher Geier, accomplice in cost 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 dialogue reveals the relative decline of an organization that pioneered exports from the Middle East, helped begin Alaska’s oil {industry} and led the exploration of the North Sea. In the Nineties, its acquisition of U.S. large Amoco Corp. compelled the remainder of the {industry} to react.

As not too long ago as 2010, BP had the identical market capitalization as Shell and produced extra oil and fuel. Today, even earlier than the BG deal is accomplished, BP’s worth at $131 billion is two-thirds of Shell’s. It’s even additional behind Exxon, the world’s most precious oil firm at $368 billion.

There’s one clear motive, after all: the Gulf oil spill that left BP dealing with prices which will ultimately exceed $40 billion, forcing it to shrink to outlive. Since taking on within the months following the accident, Dudley’s offered a few third of the corporate’s property and manufacturing has fallen from near 4 million barrels a day in 2010 to a bit of greater than 3 million.

Some have applauded the creation of a leaner, extra profit- targeted firm, however BP can now not declare to be within the first rank of world oil and fuel producers.

Deep Water

The slimmed-down BP nonetheless has loads to draw potential acquirers, together with robust deep-water prospects in Angola and the Gulf of Mexico, a refining enterprise that’s outperformed friends, and an industry-leading buying and selling outfit.

Dudley has few choices to make the corporate more durable to purchase. The conventional route is a defensive acquisition, a plan of action it’s contemplating, the folks acquainted with the matter stated.

However, any deal massive sufficient to dissuade potential consumers would additionally characterize a major departure from Dudley’s avowed concentrate on conserving BP to a manageable dimension.

Fresh Buyback

A recent buyback of shares has additionally been steered by advisers, the folks stated. The firm returned $8 billion to traders final 12 months after promoting its stake in a Russian enterprise.

BP’s inventory slipped 0.7 p.c in London on Tuesday, closing at 480 pence.

Dudley declined to remark particularly on BP’s plans, or on his views of its vulnerability.

“On the industry as a whole, if oil prices stay down, we’ll probably see more M&A,” he stated after an April 16 shareholder assembly in London. “If it stays lower for longer, the dynamics will change and companies will change their strategy.”

Ironically, components which have contributed to BP’s difficulties might additionally preserve it from being purchased. The authorized liabilities stemming from the Gulf spill are nonetheless open-ended as the corporate stays embroiled in U.S. litigation.

Federal Fines

A U.S. decide is anticipated to rule on the scale of federal fines BP should pay later this 12 months, which might whole $13 billion, and it’s being sued by a number of states. In any occasion, appeals are more likely to preserve BP’s legal professionals busy for years.

Russia is one other query mark. After a fancy 2012 deal to promote its stake in Russian enterprise TNK-BP, BP owns 20 p.c of OAO Rosneft — the Kremlin-controlled oil producer that’s topic to U.S. and European Union sanctions. While in the long term that brings a main place on this planet’s largest energy- producing nation, there are many near-term dangers, and President Vladimir Putin’s authorities might oppose a change of palms.

Enterprise Value

Despite these pitfalls, BP’s attraction for potential consumers isn’t laborious to quantify. The London-based firm has the bottom enterprise worth relative to the amount of oil and fuel manufacturing of any of the six largest U.S. and European vitality producers. Based on the present share value, its oil and fuel reserves are valued at about $7.45 a barrel, virtually half Exxon’s.

Discussions of probably acquirers for BP are likely to return to the U.S. agency. Exxon, the world’s largest personal oil producer, is on the hunt for acquisitions to be able to compensate for difficulties increasing its personal manufacturing, folks acquainted with the state of affairs have stated. With virtually no debt and greater than $200 billion in shares repurchased over the previous 16 years, Exxon has the monetary energy for nearly any conceivable transaction.

“The issue may not be that BP is weak, but that Exxon is that much stronger,” stated Scott Cockerham, a managing director in Houston at vitality advisory agency Conway MacKenzie. “If Exxon thinks BP is a good fit, it can act on that assumption.”

Nonetheless, loads of hurdles stay to an Exxon supply. The Texan firm’s famously buttoned-down engineers have lengthy been privately disdainful of BP’s inner practices and security report, making a cultural match troublesome.

An acquisition by Exxon might additionally make the mixed firm too massive, attracting the eye of antitrust regulators around the globe. And the U.Ok. authorities may object to the sale of a previously state-owned agency — till the Nineties referred to as British Petroleum — to an American concern.

Whether Exxon makes a play or not, BP is adapting to a world the place 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, stated final week. “There could be more deals.”

–With help from Javier Blas and Ruth David in London and Matthew Monks in New York.