Why BP Looks So Tempting

At the end of last week, BP (NYSE: BP) shares spiked higher on heavier than normal volume. The catalyst for the move was reportedly buyout rumors swirling around the company.

This is a scenario I have addressed several times over the past couple of years. I first suggested in a 2010 article shortly after the Deepwater Horizon oil spill in the Gulf of Mexico that BP might ultimately succumb to the fallout from the disaster. Historically, companies have a difficult time recovering from such a monumental disaster due to long-term damage to the corporate brand.

In an article here in January 2015, I made a BP buyout or merger “my most aggressive, wild card prediction for 2015.” I noted that it was aggressive primarily because a buyout of this size (BP has an enterprise value of ~$150 billion) could take some time to play out and that there were only a handful of potential suitors capable of pulling it off.

I laid out my reasoning for BP as a takeover target in a series of posts in 2015. In addition to having a permanently damaged brand, the company would struggle with the legal liabilities from the 2010 spill.

On the other hand, uncertainties around the spill liability could scare away some suitors. In addition, there are antitrust issues that would need to be navigated, and the UK government would very likely oppose such a move.

Ultimately it becomes a question of value, though, and that’s where I felt like BP would be hard to pass up by one of the supermajors. I mentioned ExxonMobil (NYSE: XOM), Shell (NYSE: RDS-A), and Chevron (NYSE: CVX) as potential suitors. To understand why a competitor might want to buy out BP, take a look at some of the important performance metrics of the supermajors:

  • EV – Enterprise Value in billions of U.S. dollars as of March 10
  • EBITDA – Earnings before interest, tax, depreciation and amortization for the trailing 12 months (TTM), in billions
  • Debt – Net debt at the end of the most recent fiscal quarter
  • Res – Total reserves at year-end 2016 in billions of barrels of oil equivalent (BOE)
  • 1 Yr Ret – Total shareholder return, including dividends, over the past 12 months

Most of BP’s metrics are attractive, but the EV/Reserves ratio really stands out. If you consider BP’s entire enterprise value and divide it by the company’s total oil and gas reserves, it comes out at only $8.32/bbl — less than half of the others. That makes BP an extremely attractive target for a company looking to add substantial reserves to its books at a deeply discounted price. ExxonMobil is out scouring the world for oil, but on BP’s books they could “find” reserves — 2nd only to its own among the supermajors — for less than half the value of ExxonMobil’s own reserves.

Notably, ExxonMobil has a very different corporate culture from BP, but the value may prove to be too compelling. ExxonMobil isn’t a stranger to huge deals either; it’s $80 billion acquisition of Mobil in 1998 was the largest in history at that time. More recently, ExxonMobil acquired XTO in 2010 for $36 billion. If they did acquire BP, the deal could once more be the largest corporate acquisition of all time.

I don’t know what’s going to happen, but it’s clear that BP’s reserves are trading at a deep discount to its competitors. Therefore, it won’t come as a huge surprise if a buyout offer does come at some point. These things are always difficult to predict. But should it happen, you now have some insights into the reason. As always, we will continue to monitor the BP situation and help advise subscribers on appropriate actions at The Energy Strategist.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

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