BP should say goodbye to its U.S. operations
Rome -- ereguly@globeandmail.com
If you're charitable, you could call them value investors or opportunists. If you're not, grave dancers or bottom feeders would do. Whatever name you choose, there is no doubt they are eyeing BP in the same way a famished wolf eyes a fat wounded lamb. The takeover of BP could very well be the next phase of the sorry corporate saga that started on April 20, when the British oil giant's Deepwater Horizon rig went to the bottom of the Gulf of Mexico, triggering the worst oil blowout in American history.
How could BP's competitors not dream of snatching such a oily prize? BP shares have plunged by more than 50 per cent since the well ruptured, giving it a market value of £57-billion $(90-billion). That's one-third of the value of Exxon Mobil and half the value of Royal Dutch Shell, the only two traded energy companies bigger than BP, measured by production and revenues.
BP would be a once-in-a-century opportunity for Exxon, Shell or any of the other aspiring global oil players, among them Russia's Gazprom and PetroChina, because its lost market value may exceed the potential liabilities related to the well disaster. In a note published this week, J.P. Morgan Cazenove analyst Fred Lucas said: "The market has lost sight of the intrinsic value that is resident in such an asset-rich company like BP. We very much doubt that keen-eyed industry players have lost sight of BP's value."
As long as BP's Macondo well is spewing black poison through the northern Gulf, a takeover is unthinkable. But once the subsea gusher is capped - a relief well should be finished by August - BP's independence can no longer be assured. At that point, a better estimate of the liabilities could be made. BP has put $20-billion (U.S.) into an escrow account to pay for damages. Some analysts put the total potential damages figure at two or three times that amount; others much less (Mr. Lucas's estimate is $33-billion). So far, BP has spent $2.6-billion on cleanup costs and has paid out $128-million in claims.
BP will resist any takeover attempts. The company is giving every indication that it can pay for the mess and survive, perhaps thrive. It is hoarding cash. The dividend, worth about $10-billion a year, has been suspended. A similar value in asset sales has been announced and more sales are surely to come. Its tangible assets are worth $232-billion. BP remains a company with considerable financial reserves. Still, money in the pot won't necessarily refloat the sunken shares. Therein lies investment opportunity.
Who would launch a takeover attempt? Exxon and Shell are the natural candidates. Exxon has had a good reputation for safety and technical expertise since the Exxon Valdez tanker belched oil into Alaska's Prince William Sound in 1989. It also won kudos for the deft integration of Mobil a decade later. Shell makes sense if only because John Browne, the predecessor to BP boss Tony Hayward, once saw the industrial and financial logic of merging the two companies. A thwarted attempt to do so was made in 2004.
Any takeover attempt would be bitterly fought, if only for political reasons. BP is Britain's biggest company and pays local pension funds one-seventh of their dividend income. You can bet that politicians will wrap the Union Jack around BP the moment a foreign bid arrives, even though the company has just as many American as British shareholders and counts its U.S. operations as its single biggest business. There is a price, however, at which BP shareholders could not say no, no matter what the suddenly jingoistic politicians say. Ownership still comes with some rights.
As for Chinese or Russian buyers, forget it. China has had no luck buying brand-name American oil companies. Remember the national security firestorm when, in 2005, Chinese National Offshore Oil Corp. (CNOOC) tried to buy California's Unocal? Gazprom would adore owning BP, especially since BP owns half of the TNK-BP joint venture, Russia's third-biggest oil producer. Russian owners would not sit well with the Americans or the British, especially since Russia allegedly seems intent on stuffing lovely American neighbourhoods with undercover agents.
A more likely scenario than an outright purchase of BP would be the sale of its American operations, which include the vast Gulf drilling and production business. Selling the U.S. business would do more than fund BP's blowout-related cash requirements; it would rid the company of a spoiled asset. After BP's fatal Texas City oil refinery explosion in 2005, the 2006 oil leak in Alaska and the allegations that it was either sloppy or reckless in drilling the Gulf's Macondo well, BP's goodwill rating is zero. Its retail business is already suffering. So why not sell the U.S. division or spin it out?
Shale gas is another reason why BP might want to get out of Dodge in a hurry. BP has targeted U.S. shale gas as one of its main growth areas. But the gas isn't offshore; it's under farms and towns and backyards. Community goodwill, not geology, is the limiting factor. Since BP is public enemy No. 1 in the United States, its negotiations for access to the gas are bound to be fraught.
BP is unlikely to pay the ultimate price - bankruptcy - for the Macondo catastrophe. Punishment in the form of losing its U.S. business is more probable. BP's challenge, and duty to its shocked shareholders, is to avoid a distress sale.
