Is BP Really A Takeover Target For Exxon?

Tuesday, Jul 05 2011 by
Is BP Really A Takeover Target For Exxon

I find it interesting that in the past weeks we have seen a few reports stating that BP (LON:BP) could be taken over by Exxon (NYSE:XOM). Given that the idea seems to be taking hold at a couple of banks, I believe that in order to properly analyse that possibility, apart from brokers' speculation, one would have to answer a few questions, critical to assess if a $400bn company would bid for a $139bn one at a premium (which inevitably would require masses of synergies and benefits, as it would have to be done with a capital increase).

I would suggest an academic thought process that answered these questions:

A) Does Exxon want Amoco at a higher price after the history since 1998? When BP merged with Amoco in 1998, the energy world was shocked. Shocked partly because Amoco was seen as a "less attractive" set of assets in the industry. Exxon's current CEO, Rex Tillerson, was a top manager then and knew Amoco well. Since the $110bn merger of BP-Amoco in 1998, what we have seen out of the integration have been challenging returns, unfortunate incidents from Texas City, to Thunderhorse and Prudhoe Bay, culminating in Macondo. Considering that the liabilities and risk of gross negligence of Macondo are better understood but not fully clarified, would Exxon pay premium multiples for a replica of their core business and such a risk?. 

B) Is BP much cheaper than other Big Oil stocks? It does not look massively cheaper than its peers, it is simply more of a conglomerate due to TNK. The entire sector has de-rated (see here), and BP only trades at a small discount to its peers (c5%), yet trades at a premium to mid-sized US integrateds. Exxon is much more expensive than BP on multiples, but that is a reflection of its industry leading ROCE position, lack of quoted divisions and centralized structure. Just on ROCE metrics, a very important one for the US giants, BP would be highly dilutive (Exxon's ROCE stands at the top end of the industry range, at 23%, BP at 17.6% ex-Macondo costs).

Meanwhile, BP is conducting a very logical and commendable "shrink to grow" strategy that will inevitably make the company focus in re-structuring. And selling legacy assets means also selling high return, fully depreciated assets, at good price admittedly, but puts pressure on delivering super-normal returns…

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Daniel Lacalle's views expressed in this blog are personal and should not be taken as buy or sell recommendations.

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BP p.l.c. is an integrated oil and gas company. The Company owns an interest in OJSC Oil Company Rosneft (Rosneft), an oil and gas company. The Company's segments include Upstream, Downstream, Rosneft, and Other businesses and corporate. The Upstream segment is engaged in oil and natural gas exploration, field development and production, as well as midstream transportation, storage and processing. The Downstream segment has global manufacturing and marketing operations. The Rosneft segment has a resource base of hydrocarbons onshore and offshore. The Other businesses and corporate segment comprises the biofuels and wind businesses, shipping and treasury functions, and corporate activities around the world. The Company provides its customers with fuel for transportation, energy for heat and light, lubricants to keep engines moving and the petrochemicals products used to make everyday items as diverse as paints, clothes and packaging. more »

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The Royal Dutch Shell plc explores for crude oil and natural gas around the world, both in conventional fields and from sources, such as tight rock, shale and coal formations. The Company's segments include Integrated Gas, Upstream, Downstream and Corporate. The Integrated Gas segment is engaged in the liquefaction and transportation of gas and the conversion of natural gas to liquids to provide fuels and other products, as well as projects with an integrated activity, ranging from producing to commercializing gas. The Upstream segment includes the operations of Upstream, which is engaged in the exploration for and extraction of crude oil, natural gas and natural gas liquids, and the marketing and transportation of oil and gas, and Oil Sands, which is engaged in the extraction of bitumen from mined oil sands and conversion into synthetic crude oil. The Downstream segment is engaged in oil products and chemicals manufacturing, and marketing activities. more »

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  Is BP fundamentally strong or weak? Find out More »

7 Comments on this Article show/hide all

tournesol 5th Jul '11 1 of 7

A thoughtful op ed piece which I read with interest.

i would just say that whilst everything the author says is true, I thought along v similar lines a few years ago in connection with the "merger" betrween Exxon and Mobil. I used to work for Mobil, knew how tightly managed it was and found it difficult to envisage major savings/synergies. And I just found the scale of the "merger" implausible.

Despite my reservations that deal went ahead and appears to have been well executed. As were many of the Mobil senior management team.

The fact is that the era when the seven sisters bestrode the world has ended. The world now trembles to the heavier tread of the NOC's backed by state money and charged with achieving security of supply and control of national resource rather than shareholder return. The majors are finding their access to resources increasingly constrained.

Maybe an ExxonMobilBP can cope better with current circumstances than its smaller precursors.

I'd be surprised if discussions between XOM and BP had not been mooted even if only at a conceptual level.

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Biggles 5th Jul '11 2 of 7

So, if you're a shareholder, what price would you accept for your BP shares?
£6? Conceivable they could see this anyway in the next 12 months?
£6.50? Now you're talking!

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tournesol 5th Jul '11 3 of 7

surely there would/could not be a cash offer for a transaction of this scale?

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djpreston 6th Jul '11 4 of 7


Sure they could find the cash. Itd be a mighty undertaking to set up the loans/facilities given the size and therefore the number of banks to be brought together but it could be done.

Asset disposals would be required for competition measures imo - easy to put that against debt. Then there's the option of hedging production to pay down the debt. 3.5m boepd provides a lot of cashflow.

Will it ever happen though? Doubt it would go through the authorities and that XOM could achieve a lot more with a purchase of BG. Perhaps RDS and BP merger???

Fund Management: European Wealth
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Biggles 6th Jul '11 5 of 7

I think the important point is that BP is once again in the doldrums, as it was in the early 1990's but without the inspired leadership that emerged then to take it charging forwards.
And it is absolutely right that the NOCs are now in the driving seat and the Majors 'bulking up' to compete with them makes a lot of sense.

So no doubt XOM and RDS are thinking about it.

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Biggles 7th Jul '11 6 of 7

....and then there's....

Spills & Spin; The Inside Story of BP, is published today. The book provides a behind-the-scenes look at the decisions and personalities that have shaped the company over the past 20 years. It charts BP's rise from industry also-ran in 1990, to industry-leader, under Lord John Browne, by the turn of the century, and the company's fall from grace since the Texas City blast in 2005. It reveals the truth behind BP's mega mergers and its (successful) attempt to turn climate change from a mortal threat to a lucrative business opportunity.

It investigates CEO Tony Hayward's restructuring of the group from 2007-2010 and reveals how decisions made on his watch contributed to the oil spill. The book also lifts the veil on the corporation's response to the spill, revealing the strategic errors, technical mistakes and infighting between company leaders which hampered the response effort.

Please find below a review from the Daily Telegraph today. The Sunday Times said they planned to review it this weekend and a video of a CNBC interview I just did, about the book, may be available on the CNBC Europe website soon.

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Biggles 27th Jul '11 7 of 7

Slightly off message but I wonder if BP is losing its grip, or at least its corporate memeory?
Apparently they have entered an alliance with XCite re their Heavy Oil which as we all know has more than its fair share of 'additives'.
Don't they remember what happened last time?

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About Dlacalle


Fund manager in Oil,Gas and utilities. I was voted Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters' Extel Survey 2011, the leading survey among companies and financial institutions. More than 21 years of experience in the oil, gas and utilities fields from corporate to investment banking, research and fund management.  more »

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