BP: An Exxon Takeover or Asset Sale?

The rumors continue to swirl around BP (BP) as it tries to put a new cap on the oil leak 5,000 feet below the surface of the Gulf of Mexico. The Sunday Times of London reported that BP might sell its Prudhoe Bay assets to U.S. oil company Apache (APA) for $12 billion. The paper also reported that Exxon Mobil (XOM) has approached regulators in Washington for approval to buy BP. According to theDaily Mail, "the U.S. government has told Exxon that it will not stand in its way if it chooses to attempt a takeover."

Crude still flows freely from the leak while the talks continue. There is no guarantee that the new cap will work or that the relief wells, which should be completed in a few weeks, will cut the flow of oil. BP's liabilities mount each day. The company announced Monday that its costs have already reached $3.5 billion.

Speculation has increased in the last two days that BP's options to cover its costs are narrowing. The firm may sell debt or equity to investors in the Middle East. It could borrow money from banks or make a public offering of debt. The company could also raise money through a public stock offering.

The Exxon rumor seems improbable. The world's largest oil company would have to take on massive liabilities. Even with Exxon's balance sheet and cash flow, this would be an extraordinary risk. The Apache rumor, on the other hand, sounds more likely. The value of BP's assets near the Arctic are easier to establish and can be separated from the liabilities related to Gulf disaster.

BP's shares moved up sharply on the Exxon rumor. The market clearly believes that something will happen soon as the damage to BP grows.