Opinion: With Shell out of the picture, who will dance with BP?

Loren Steffy
Loren Steffy
Opinion by Energy Voice

I was off by one letter.

If you had told me a year ago that Shell was going to make one of the biggest acquisitions in energy industry history, I would have guessed the target was BP.

Instead, Shell plunked down $70 billion for BG after a month of whirlwind talks that reportedly began with a Sunday afternoon phone call between the two top executives.

For Shell, the deal builds on its plans to bolster is global liquefied natural gas business and gives it access to lucrative Brazilian oilfields. For BG, the deal ends a year of losses, a falling share price and executive changes.

But what about BP?

After all, Shell and BP were long mentioned as potential dance partners.

Back in the 1990s, BP’s then-chief executive, John Browne, had plans to buy Shell.

More recently, it seemed like the deal would go the other way.

BP remains vulnerable to a takeover.

Its shares have never recovered from the Deepwater Horizon disaster five years ago, and it continues to trade at a steep discount to its peers.

BP shares have lost 33 percent of their value since the accident, while Exxon Mobil has risen 25 percent, Chevron is up 32 percent and Shell increased 10 percent.

So far, it’s only protection from a takeover has been the uncertainty of the legal liabilities from the 2010 accident, but those are beginning to come into focus.

The punishment phase of the trial continues in New Orleans, which could result in fines of as much as $13.7 billion against BP.

That would be in addition to the $28 billion that BP says it already has spent on cleanup and settling civil claims. Factor in a $4.5 billion criminal settlement in 2012, and BP expects the spill to cost it about $43 billion.

With numbers that large, though, the margin for error on such predictions could be billions of dollars.

BP still has a lucrative asset portfolio that would make it attractive to a buyer who was willing to shoulder the legal liabilities.

With Shell out of the picture, the most likely suitors are both American: Exxon Mobil and Chevron.

For one thing, both understand the US legal and regulatory system, which will be important for managing BP’s assets going forward.

Exxon has been mentioned as a potential buyer almost as frequently as Shell.

With just two years left until retirement, chief executive Rex Tillerson could use a bold move to cement his legacy.

Tillerson’s last acquisition, the $41 billion purchase of US onshore shale producer XTO in 2010, hasn’t worked out so well, coming just as U.S. natural gas prices began a two-year slide.

His other breakout venture — a drilling partnership in Russia with Rosneft, the state-owned oil company, has been mired in political difficulties stemming from US sanctions against Russia.

In a recent report to clients, Morgan Stanley analysts noted that Exxon could use a big purchase to replace declining reserves, it raised about $7 billion in cheap debt recently and its stock trades at a premium, making its shares an attractive takeover currency.

Exxon also could instill a cultural discipline that BP has lacked. BP is a company whose history was marred by operating failure in the decade preceding the Deepwater Horizon accident.

How well the company has addressed those failing this time around remains an open question.

Any buyer would have to be wary of integrating BP’s safety culture into its own.

Exxon, however, is among the most adept in the oil business of combining cultures. Its 1999 acquisition of Mobil is considered a textbook case of how to successfully merge two large corporations.

It also demonstrated a rare ability among companies its size to bring real change to its safety culture after the Exxon Valdez accident in 1989. Today, Exxon is considered the gold standard of safety.

In other words, if BP still needs to improve its safety culture, Exxon maybe just the buyer to make it happen.

Chevron, on the other hand, has more mundane reasons for being interested in BP. The Shell-BG deal means the global oil business is now divided into Exxon Mobil and Shell at the top, and everyone else below them. Chevron is a distant third.

Buying a company the size of BP would elevate it into the elite tier of the new ultra-supermajors. (With another round of mergers, we’re running out of superlatives.)

Chevron, too, could help BP better address safety issues. The company has emerged as a leader in process safety, particularly in offshore operations.

Of course, BP has said it wants to remain independent. It’s spent the past five years selling assets and trying to refocus around a smaller, more profitable reserve portfolio.

So far, investors have been unimpressed. Stock and oil prices being what they are, the company may have no choice but to accept a buyout.

Given BP’s current discount to its peers and the downward pressure from oil prices, the most profitable project of all may be the sale of the entire company.

Loren Steffy is a managing director with the communications firm 30 Point Strategies. He is a writer at large for Texas Monthly and the author of Drowning in Oil: BP and the Reckless Pursuit of Profit and The Man Who Thought Like a Ship. Follow him on Twitter: @lsteffy; on Facebook or at lorensteffy.com.