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Takeover Rumors: Why Would Anyone Want to Buy BP?

From left, ExxonMobil chairman and CEO Rex Tillerson, Chevron chairman and CEO John Watson, ConocoPhillips CEO James Mulva, Shell Oil president Marvin Odum and BP America chairman and president Lamar McKay testify on Capitol Hill in Washington on Tuesday, June 15, 2010: Haraz N. Ghanbari / AP

By Vivienne Walt Tuesday, Jul. 13, 2010
Who would want BP? Perhaps one of the least-loved companies in the world right now, the energy giant is spending more than $30 million a day trying to clean up its catastrophic oil spill in the Gulf of Mexico. And that figure could pale in comparison with its legal liabilities for the Deepwater Horizon rig explosion if judges rule against the company in the dozens of lawsuits that have been filed in U.S. courts.

Despite all that, there have been rumors in recent days that BP’s biggest rivals are circling the company for a possible takeover or merger, even as its public image is surely at one of the lowest points in its 102-year history. The speculation began on July 11, when Britain’s Sunday Times newspaper published an article saying that both Chevron and ExxonMobil had sought clearance from U.S. officials to explore a possible deal with BP, valuing the company at about $100 billion. The paper quoted an unnamed source in the oil industry as saying, “There have been talks at a high level.” (See pictures of people protesting BP.)

If so, those talks seemed to have sputtered by the following day, when ExxonMobil executives flew from Texas to New York City for one of the company’s periodic road shows for big investors. Exxon’s managers told shareholders in Manhattan that while they might like to acquire BP’s massive assets, they thought U.S. officials would never accept the deal. “They said that given the political landscape and the regulatory hurdles, it’s very unlikely that any combination of major [oil] companies could happen,” says Fadel Gheit, an oil analyst for Oppenheimer & Co. in New York who helped arrange ExxonMobil’s meetings with investors. “A merger,” he says, “is possible, but unlikely.”

Here is why: Creating a supergiant energy company would cause major political ruptures in both the U.S. and Britain. If BP merged with either ExxonMobil or Chevron, it would create a firm worth potentially about $400 billion that would control oil and gas fields around the planet. Britons could well fight hard to keep one of their flagship corporations from leaving the country — similar to the way U.S. public outcry scuttled the sale of energy company Unocal to China’s CNOOC. “I can’t see either the U.S. or the British government letting someone come in and buy BP,” says Philip Weiss, a senior energy analyst for Argus Research in New York. U.S. politicians would abhor the idea, fearing that a merger would inevitably lead to huge job losses at a time of high unemployment — about 50,000 people were laid off after Exxon took over Mobil. “No politician is willing to be associated with this decision,” says Gheit. (See pictures of the Gulf oil spill.)

So what will BP do? Its costs for the oil spill — which has been gushing up to 60,000 bbl. a day since the explosion on April 20 — could amount to about $60 billion. That figure would be divided roughly equally among cleanup expenses, legal-liability claims and compensation for victims of the spill under U.S. law. While that is a huge sum, BP’s assets are worth a whopping $350 billion — including its oil and gas fields, refineries and retail gas stations — making the biggest oil spill in history a disaster the company could survive. (Comment on this story.)

Still, BP is already feeling the pain of the calamity. Just how much pain might be revealed on July 27, when BP is expected to present its quarterly earnings. The company’s fortunes have changed drastically since it released its latest quarterly earnings in late April. Then, BP estimated that about 1,000 bbl. a day were gushing into the Gulf of Mexico — a small fraction of the actual amount — and assured investors that it was not a huge problem. This time around, shareholders will likely demand to know how BP intends to pay for the Gulf of Mexico catastrophe, since the company’s stock has sunk about 40% since the Deepwater Horizon exploded, wiping out about $90 billion in market value, according to Gheit’s estimate. The company has already announced that it will not pay dividends and that it has cut capital spending.

But instead of BP executives putting the company on the block, industry watchers say, the company will probably sell off some of its sprawling assets, raising cash to pay for the oil spill, while trimming some of its less-prized operations. Despite BP’s troubled state, many companies might compete over sales, since they face dwindling opportunities to drill new wells — resources are increasingly controlled by state-run firms in many countries, while in other regions, oil production is dropping as fields age. In addition to that, President Obama on Tuesday imposed a new moratorium on deepwater drilling off the Gulf of Mexico and the California coast. (Watch TIME’s video “Portraits from the Oil Spill.”)

Several reports on Monday said BP was negotiating a $10 billion deal to sell its operations in Alaska’s Prudhoe Bay — where BP suffered a calamitous oil spill in 2006 — to Houston company Apache Corp., which specializes in buying old, declining oil fields from huge companies and then working them until they expire. Purchasing pieces of BP rather than the company itself would offer a key benefit to buyers: they wouldn’t be taking on BP’s giant legal responsibilities, with costs that could run to tens of billions of dollars. It could take several years to determine that figure, which will be set by juries. “The liability around this oil spill is unknown,” says Argus Research analyst Weiss. “And I don’t see how you can get someone willing to take that on. Especially since there is no knowing where it will end.”

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