The oil industry has long been prone to cannibalism. When the price of crude collapses, so too does the value of businesses exploring for it, extracting it and refining it. The giants feed as the others cower.
It’s been 15 years since the last M&A feeding frenzy, which led to the era of the ‘super-producers’ known today – Exxon Mobil, Chevron, Shell, Total and BP. With oil persisting at $50 to $60 a barrel for nine months now, however, fresh deals have started to be made.
Halliburton bought Baker Hughes for $35bn (£23bn), Shell bought BG for £47bn, and now some are starting to speculate that there are hungry eyes on BP. BP is the BFG of the oil giants, the smallest and most vulnerable, so much so in fact that the outgoing British government has told the firm it would oppose a takeover, according to an FT report.
BP had no comment, but the (ex) government dropped a more official hint of their position. ‘The government talks to a wide range of UK businesses, as you would expect. It is in the UK’s interest to have British companies competing and succeeding at home and abroad.’
It is very unusual for the government even to hint about stopping a takeover (could it be because there's an election coming?), but nonetheless it's probably not enough to stop a takeover. For a start, no one knows what complexion the government will have after May. Whoever it is would need to take some extraordinary measures to block a takeover of BP, as the state currently has no formal powers to do so.
Presuming the government of the next Parliament wouldn’t stop it, what would this deal look like? Clearly, there are very few firms big enough to acquire BP. Exxon Mobil, as the largest oil firm in the world, is probably the natural choice, but even then it would be a huge ask.
Exxon's current market cap far exceeds BP's, but the gap in assets is far smaller. Sources: 2014 annual reports of Exxon Mobil, Shell, Total, BP and Chevron.
As the chart shows, Exxon is significantly larger than BP in terms of market capitalisation, but BP is still far too big for Exxon to buy outright. Exxon has $4bn in cash or cash equivalents, meaning any deal would be an unequal merger rather than a straight acquisition.
Exxon's profits are also markedly higher than BP's, but the same can't be said for production. Sources: 2014 annual reports of Exxon Mobil, Shell, Total, BP and Chevron.
The second chart shows that the difference between the two companies persists in profit terms, but not in production levels. The reason for that disparity is the reason Exxon is ultimately unlikely to want a tie up with BP.
BP has two albatrosses hanging around its neck. The legacy of the 2010 Deepwater spill in the Gulf continues to weigh heavily. It’s already forked out $50bn in clean-up and compensation costs, and the court cases are far from finished. There could be tens of billions still to be paid.
Then, there’s Rosneft. BP owns a 20% stake in the Russian state-owned oil giant – a stake that has halved in value since last year, as western sanctions over Ukraine have hit. Both of these have contributed to BP’s recent losses, and both create uncertainty about its future.
Of course, the whole reason for a big company to swallow a (somewhat) smaller one in a time of turmoil is that it can get it cheap compared to future earnings. Perhaps Exxon figures Russian and Gulf woes can’t last forever.
Exxon hasn’t said anything about any of this, and neither have the other giants. If any of them had been thinking of approaching BP, however, they’ve probably missed the boat. BP shares have risen 30% since the New Year. That’s only 22% less than its pre-Deepwater high in 2010. Unless it falls dramatically, a takeover seems fairly unlikely. Somehow it seems unlikely that the 1% fall this morning to 462p will have BP boss Bob Dudley too worried.