After the Oil Spill, Is BP Takeover Bait?

Greenpeace protest BP
Greenpeace protest BP

With BP stock price off by more than 30% from a 52-week high following the Gulf oil spill, the worst in U.S. history, many investors are wondering: Is the stock a good value? Or are the liability risks too great?

No doubt, BP's (BP) rivals are also thinking about these matters. A recent item in Reuters Breakingviews raises the idea that the company could be a takeover target. The oil industry has many global players that have the resources to pull off a deal -- Exxon (XOM), for example, or even state-owned oil operators.

So is takeover talk realistic? Perhaps. However, the timing is probably at least a couple of years away.

Takeover Problems

When it comes to mergers and acquisitions, buyers look at a myriad of factors:

Valuation: Simply put, this is ultimately the result of a company's projected cash flows. BP certainly has a strong profile, with cash flows of $7.7 billion in the latest quarter.

Contingent Liabilities: These can be deal killers. True, a buyer can skillfully use corporate structures to reduce or even eliminate contingent liabilities.

However, this may be impossible for BP. In light of the political environment, regulators are unlikely to allow a merger that involves the shielding of liabilities.

What's more, it's tough to get a sense of the extent of the liabilities, which will involve the cleanup as well as the damages to tourism along the Gulf coast. Is the cost $15 billion? $50 billion? There's no clear-cut answer.

Integration: With the distractions of the oil spill, BP really does not have the focus to pull off a deal or to take the steps to combine with another operation. Besides, the company's safey track record has highlighted a lax culture. Apart from the Gulf disaster, BP also had an explosion in a Texas City refinery in 2005, which killed 11 workers, and a spill in Prudhoe Bay a year later. Such things make it extremely difficult for a buyer to get interested in a deal.

Strategic Rationale: Does BP offer the kinds of assets that a buyer wants? The answer may be no. A key strategy for BP has been deepwater drilling, which will now be under tremendous scrutiny.

Interestingly enough, major oil companies have instead been striking deals to diversify into less conventional energy sources like natural gas. For example, Exxon spent $41 billion on XTO (XTO), and Shell (RDS.A) recently agreed to pay $4.7 billion for East Resources.

The Future

Going forward, BP will likely undergo an extreme makeover of its culture. But this will take many years.

In the meantime, the oil company will have a tough time getting permits and approvals. Also, it would probably be difficult for BP to strike major acquisition deals because of resistance from government officials. Rather, the company may instead focus on selling various assets.

Taken together, it's tough to find catalysts for growth at BP.