Royal Dutch Shell Plc  .com Rotating Header Image

Are BP’s days numbered?

BP’s stock price may make it takeover bait

By LOREN STEFFY Copyright 2010 Houston Chronicle

June 1, 2010, 10:39PM

Are BP’s days numbered?

That question bubbles up from beneath new cost estimates and growing market skepticism as the company’s latest attempt to cap a runaway well a mile below the Gulf of Mexico failed last week.

The British-based oil giant has been hammered by investors, regulators, the public and even the U.S. president, and while it’s trying yet again to stop the oil flow, it could be the end of summer before it succeeds.

A few weeks ago, it appeared the disaster might just result in regulatory backlash and cost CEO Tony Hayward his job. Now, it’s the future of BP as a stand-alone company that may be in jeopardy.

BP’s U.S. share price has fallen 40 percent since the explosion of the Deepwater Horizon drilling rig on April 20, to $36.52, its lowest in more than a year. The decline has slashed almost $75 billion from BP’s market value, leaving it worth about $114 billion and making it among the wimpiest of the supermajors.

By comparison, Exxon Mobil’s market value is $278 billion, Chevron’s is $145 billion and Shell’s is about $163 billion.

That last comparison is telling, because for more than a decade, Shell traded at a discount to BP. In 2004, an emboldened BP considered acquiring Shell, former BP CEO John Browne said in his book Beyond Business. (The deal was scuttled by the Texas City refinery explosion, which led to Browne’s ouster.)

Now it may be Shell that has the upper hand. Such an acquisition would, of course, face antitrust opposition in the U.S. and Europe, but six years ago Browne planned to dodge those concerns by selling BP’s U.S. refining and retail operations.

Still, it’s unlikely that Shell or anyone else will go near BP as long as the Macondo well is still belching crude into the Gulf.

‘Legal nightmare’

“Why on earth would another company want to wade into this legal nightmare?” asked Pavel Molchanov, an analyst with Raymond James. “The other supermajors are likely to stay as far away from this as possible.”

Molchanov, who has a “hold” rating on the stock, recommends other investors do the same. While the shares may look cheap, BP has acknowledged that the oil could flow unabated until a relief well is completed in August, which means “we’re looking at two months of excruciating news flow,” Molchanov said.

Ballooning expenses

BP said it’s already spent almost $1 billion on the futile efforts to plug the well and clean up the spill, and Molchanov estimates its expenses this year will balloon to $5.2 billion from $1.6 billion. That doesn’t include the cost of civil lawsuits or any possible fines or criminal liability.

While $5 billion is a huge expense, it would represent about one-quarter of the profit that analysts forecast for BP this year.

The question, then, is whether the open-ended liabilities from the spill are enough to scare off a suitor with the deep pockets of an Exxon Mobil or Shell. The more BP’s shares fall, the more attractive that tradeoff becomes.

BP’s biggest reserves are in politically stable areas — the U.K.’s North Sea, Alaska and the Gulf. At a time when large oil deposits are concentrated in the hands of state-owned oil companies or in volatile regions such as Africa, BP’s assets may start looking like a bargain to rivals.

Concentrating those reserves in one company would probably make regulators on both sides of the Atlantic uncomfortable, but oil is a global market, and the combined reserve base would still be tiny compared to the vast holdings of state-owned companies such as Saudi Aramco or Russia’s Gazprom.

Takeover shield?

Ironically, the very spill that’s driving down its stock price may be shielding BP from a takeover for now. But even if it survives this disaster as a stand-alone company, its operations will be affected for years.

“As a result of this disaster, regulatory scrutiny of BP’s operations, not just in the U.S, but overseas as well, will be elevated,” Molchanov said.

Better late than never.

Loren Steffy is the Chronicle’s business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at [email protected]. His blog is at


This website and sisters,,,, and, are owned by John Donovan. There is also a Wikipedia segment.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.