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BP’s share price plunge spurs speculation over its future home

Analysts question BP’s ability to pay dividends

Terry Macalister Wednesday 2 June 2010 18.22 BST

Tony Hayward at the BP command centre in Houston last week. Photograph: Reuters

The survival of BP as an independent company was being openly discussed in the City today as the share price continued to tumble and its credit risk soared in the wake of its failed well-capping in the Gulf of Mexico.

Britain’s biggest oil company was said to have started merger talks with arch rival Shell in 2007 in the wake of Texas City oil refinery explosion of 2005, in which 15 people were killed. There were also some discussions in 2002 but nothing came of them. Analysts are now wondering whether merger talks could start up again as BP’s future ability to pay dividends to shareholders is questioned and its credibility in America, which provides 40% of its income, plummets.

BP saw its share price fall 3% in early trading on top of the double digit falls seen on Tuesday and it has now lost a third of its value, £44bn, since the Deepwater Horizon blowout on 20 April.

In addition the price that investors pay to insure BP’s debt – already at record levels – soared by 100 basis points to 270bp on the Markit derivatives trading platform.

“If BP’s share price continues to fall, it could become a takeover target,” said David Buik, a high-profile financial commentator at the London brokerage BGC. “There are so many imponderables over whether its liabilities would be capped or not,” he added pointing out that the position of chief executive Tony Hayward was vulnerable.

Other analysts agreed that speculation about BP’s future was inevitable as the oil leak continues, criminal investigations are being instigated by the US attorney general and relations with the White House are becoming ever more fraught.

Kim Fustier, oil analyst with the Credit Suisse investment bank in London, argued that the “risk of a dividend cut is clearly rising” as potential spill liabilities could reach $37bn (£25.25bn).

But Fustier was not willing to comment on whether BP was a possible takeover target while Shell, which announced a $4.7bn cash purchase of US shale gas producer East Resources last week, said it never responded to this kind of speculation.

Lord Browne, the former chief executive of BP, revealed in a recently published autobiography that he took BP to the brink of a mega-merger with Shell six years ago only to be thwarted at the last minute by opposition from a handful of his own board members.

“We missed the boat … we estimated that a merger could create synergies of around $9bn a year in three to five years’ time. It also would have been a significant boost to the oil industry outside of the US,” argued Browne in his book, Beyond Business.

But there were also reports that Hayward had held similar discussions as recently as 2007 when BP’s share price had been weakened by the damage to its reputation caused by the Texas City fire.

The plunging value of BP is a blow to British pension funds as it is estimated that it provides £1 in every £7 paid in dividends by FTSE-100 companies. BP is also a major provider of revenues to the exchequer, saying that it paid $6.3bn in global corporate income tax of which $1.1bn was in the UK. In addition, internationally BP expects to pay approximately $4bn in 2009 in production taxes globally, of which $0.2bn would be in the Britain.

FairPensions, a lobby organisation, said investors needed to pay more attention to the wider risks faced by the companies they put their money into whether they are oil groups or banks.

“From oil leaks to irresponsible lending, environmental, social and corporate governance issues have a history of precipitating crises that damage our economy and our investments,” said Duncan Exley, director of campaigns at FairPensions, adding: “We urge investors, or the government if necessary, to put in place measures to ensure that these issues are monitored and managed so that the next crisis is less likely to affect us all.”


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