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Who could gobble up a hobbled BP?


Oil giant has valuable assets, but unknown liabilities and history of mishaps

By Steve Goldstein, MarketWatch June 3, 2010, 3:26 p.m. EDT

LONDON (MarketWatch) — For sale (maybe) — oil giant with world-class assets, unquantified liabilities and a reputation for major mishaps.

That’s what BP /quotes/comstock/13*!bp/quotes/nls/bp (BP 39.38, +0.11, +0.28%) /quotes/comstock/23s!a:bp. (UK:BP. 432.25, +2.50, +0.58%) brings to the table as a merger target. The company, still worth about $120 billion, has been battered by fallout from the catastrophic oil spill in the Gulf of Mexico and analysts have started to speculate that the damage from the spill could end up making it impossible for BP to continue as a standalone company.

“Given the collapse in the share price and the potential for it to fall further we expect that it could become a takeover target — particularly if its operating position in the U.S. becomes untenable,” said Dougie Youngson, a London-based analyst at Arbuthnot Securities.

Going Deep
There are only a handful of companies that could entertain a merger with BP, and of course the company has not said it’s for sale. Even if it were, a rival may want to wait until the spill is finally capped — at which point BP’s market capitalization could very well improve.

In any event, BP is clearly a weakened company compared with where it stood before the spill.

The obvious partner for BP would be Anglo-Dutch rival Royal Dutch Shell /quotes/comstock/13*!rds.a/quotes/nls/rds.a (RDS.A 54.06, +0.25, +0.47%) /quotes/comstock/23s!e:rdsa (UK:RDSA 1,841, +27.50, +1.52%) , though Total /quotes/comstock/13*!tot/quotes/nls/tot (TOT 48.08, +0.90, +1.91%) or Exxon Mobil /quotes/comstock/13*!xom/quotes/nls/xom (XOM 61.74, +0.18, +0.29%) can’t be entirely ruled out either.

Merger rumors with Royal Dutch Shell have bubbled for years — and ex-BP CEO John Browne said in his autobiography the companies quietly explored such a move in 2004.

According to Browne, the companies estimated a merger could generate savings of $9 billion a year in three to five years time. Tony Hayward’s predecessor said BP missed the boat by not pursuing the deal.

Among BP’s key assets are a joint venture in oil-rich Russia and its huge presence in the Gulf of Mexico — a presence now under intense scrutiny. U.S. President Barack Obama imposed a six-month moratorium on new deepwater wells and the Justice Department is looking for possible criminal wrongdoing in events that led to the worst offshore spill in the nation’s history.

BP’s reputation in the U.S. was already battered because of the deadly explosion at a Texas City refinery as well as leaking pipelines on Alaska’s North Slope.

Shell’s problems have been more in the accounting realm, such as when it infamously overstated the value of its oil reserves at the beginning of the last decade.

It’s also had a notably tougher time than BP in Russia, where Gazprom muscled away control of the Sakhalin II field. (BP also fought a bruising battle in Russia but still controls a 50% stake in TNK-BP.)

Shell also has been plagued by its presence in Nigeria, home to an active militia targeting pipelines crisscrossing the Niger River Delta.

Shell has a bigger presence in Canadian oil sands — a presence that, thanks to BP, is looking better given the relative ease of excavating energy compared with drilling for it thousands of feet below the sea. Even the environmental consequences of oil sands — long thought to be the worst form of petroleum production — aren’t looking quite as bad when compared with the Gulf of Mexico spill.

Shell also has, for better or worse, a larger gas exposure, including liquefied, natural gas or shale variety.

What both companies also have in common is next to no presence in OPEC countries, though they harbor a desire to bulk up on reserves in Iraq.

Iraq could well be a pipedream for both companies — as could the idea of a BP-Shell merger.

Oil looks to deepwater
The Deepwater Horizon disaster may not fundamentally alter the way the industry works.
• Is more oversight coming?
• See graphic history of drilling
• Click here for Gulf energy map
• Can BP pay a dividend?
• Who might buy stricken giant

Steve Goldstein is MarketWatch’s London bureau chief.


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