Has BP's failure in the Gulf of Mexico made it a bid target?
BP's latest attempt to plug a well pumping thousands of barrels of oil into the Gulf of Mexico has failed. And with £45 billion wiped off the company's valuation speculation is rife that the oil group is now a takeover candidate.
BP shares dropped 15.52% to 418p and are now down 35.5% since the April 20 explosion.
Dougie Youngson, analyst at Arbuthnot, said there is a real risk the situation in the Gulf of Mexico could lead the company to break up.
'There has been much speculation regarding both chief executive Tony Hayward's future at the company and the possibility of the dividend being cut. In our view the situation is beyond both of these points and the key question is now ‘can BP survive?' he said.
Youngson like others has said the collapse in the share price and the potential for it to fall further means BP could eventually become a takeover target - particularly if its operating position in the US becomes untenable.
The company has an attractive and diversified portfolio of assets and former chief executive Lord Browne has said that BP would make an attractive investment for Royal Dutch Shell, providing plenty of options for cost-cutting.
But since those comments were made BP has cut costs and Shell has also begun its own restructuring.
Youngson does not think Shell would be allowed to bid for BP.
'It is highly unlikely. There is a lot of Brit bashing going on,' he said.
He thinks a bid from a US giant such as Exxon or Conoco would be much more likely to get approval from the US government, especially since the US is so dependent on exports.
'Having US owned assets in the Gulf of Mexico would be interesting [for them],' he said.
But Keith Morris, analyst at Evolution, said investors should not waste too much time thinking about a bid.
He likened buying BP now to buying a house when the surveyor has said the house may fall down.
'Just because it is cheap doesn't make it worth buying,' he said.
And while many suggest ExxonMobil and Royal Dutch Shell could buy BP if they desired - they could both afford it and there would be only minor competition obstacles - others think it unlikely either is considering such a move at the moment.
And when you look at the scale of the operation and the growing political risk to deepwater drilling in the area, it is hard to see why any company would be rushing to put their cash on the table now.
Last week US government officials said oil was pumping out of the well at a rate of up to 19,000 barrels per day, and the US government said it would not allow any more deepwater drilling at this time as BP struggles to limit the damage from the spill.
'BP's priority is to keep as much oil as we can from causing additional harm to the Gulf, the shoreline and the people of the region,' said BP Chief Executive Tony Hayward.
'This is our best option as we work hard towards completing the relief wells that will kill this well completely,' he said.
Hayward took over the top job at BP in May 2007 and is credited with turning the group around, cutting costs and refocusing the group's strategy. But after the explosion in the Gulf of Mexico which killed 11 workers, he is facing increasing criticism as both the operations to stem the flow of oil and clean-up the oil have had only limited success.
BP has already settled 30,000 claims against the group and to date BP has spent more than $1 billion on the spill.
Arbuthnot's Youngson points out BP has now tried and failed five times to stop the Macondo well flowing as the so-called top kill-and-junk shot operations have ended in failure, despite initially looking quite positive.
He said the next plan is to replace the damaged riser pipeline, which he warned could significantly increase the flow of oil to the surface if it fails.
'Given the fact that the previous plans (which had higher chances of success) have failed, this new prospect does not give us any real confidence that it will succeed,' he said.
After that, BP's only remaining option is to drill two relief wells but that will take until August to complete.
Youngson has downgraded the shares to 'sell' from 'buy'. He is worried by the emotive language coming from the US government.
‘It remains unclear what punitive measures will be put in place in terms of its operations in the Gulf of Mexico,’ he said, adding that while the spill could be the end of BP as we know it, it is still early days and too early to know how things will pan out.
He believes the $10-15 billion total cost many have been looking at may prove too optimistic.
‘No-one really knows. It is too early to say,’ he said.
Credit rating agency Moody's recently downgraded its outlook for BP to 'negative from 'stable' saying it is impossible to assess the full extent of the costs and business impact of this accident on BP.
Others believe the market has misunderstood the risk to BP, say its dividend is not really under threat and shares will bounce once the spill is back under control.
They point out that any company’s share price is volatile in the months after such a huge incident but recovers once the cost is known.
source: citywire.co.uk
