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China to the Rescue: Will PetroChina Acquire BP?

Associated Press
BP PLC CEO Tony Hayward


WSJ BLOGS  JUNE 10, 2010

By Michael Corkery

While it is difficult to know for certain what the Obama Administration believes will be the end game for BP, Deal Journal is pretty sure it isn’t this: A take over by PetroChina, a deal that would give the Chinese oil giant a huge hold on the world’s energy supplies.

And yet analysts at Standard Chartered Bank are making waves this morning with a report that floats out the idea of a PetroChina-BP merger.

PetroChina, which has a $60 billion war chest for acquisitions, is seeking to tap into overseas reserves to feed China’s insatiable demand for oil. According to Bloomberg, Chinese demand for crude is expected to rise at 15 times the rate of the demand in the US. And acquisition of BP would give PetroChina access to 18 billion barrels of oil and gas reserves around the world — a huge boost to its overseas supplies.

“We expect a full dose of skepticism on this as a real-world proposition, although we argue for the persuasive economics,” according to the Standard Chartered report.

That “real world” skepticism, of course, is grounded in the fact that U.S. regulators aren’t likely to look kindly at a Chinese oil company becoming the largest offshore oil producer in the Gulf of Mexico. Politically, a PetroChina-BP deal would about as easy to digest as the tar balls washing up on Louisiana beaches. Remember what happened when Cnooc tried to buy California’s Unocal Corp. for $18.5 billion in 2005. Back then, U.S. politicians worried about Chinese influence on world energy supplies, and nationalistic sentiments have only gotten stronger amid today’s difficult economy. Also, we can’t imagine how happy U.K. pensioners, who own BP shares, would be about having new Chinese owners. That likely pushback would mean any deal would need to involve all cash.

Earlier this week, Royal Dutch Shell and Exxon Mobil were being mentioned as possible suitors for the badly battered BP, which is facing questions about its ability to survive the fall out from the spill. Its market value has been more than halved – shedding $82 billion–since the spill began nearly two months ago.

Then, again, all of this apocalyptic speculation about takeovers and bankruptcies could be overblown. J.P. Morgan Chase analysts said this morning that BP’s market value has fallen twice as much as it should have in reaction to the spill. The investment bank estimates that clean-up costs, fines and litigation should cost no more than $29 billion ($10 billion less than the Credit Suisse estimate that is being floated around)

While these costs may require BP to sell $10 billion in assets, it doesn’t justify the stock’s huge sell off, according to JP Morgan. A few brave bulls seem to agree. BP stock is up 11% this morning.


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