Fear of takeover hovers over ailing BP

BP's failure to stop an oil leak from spewing millions of gallons of crude into the Gulf of Mexico may leave the biggest oil and gas producer in the United States in a fight to stay independent.

BP shares have plunged 34 per cent since the Deepwater Horizon drilling rig leased by the company exploded on April 20, wiping more than £40 billion ($85 billion) off the company's value. That may make BP cheap enough to attract acquisition interest, investors claim.

"The market value of BP has eroded substantially, so it could be a takeover target," said Dirk Hoozemans, of Robeco Group in Rotterdam, which sold its BP holding last year. What matters now is how forceful BP's chief Tony Hayward is in tackling the disaster and the aftermath, Hoozemans said.

With a permanent end to the leak depending on so-called relief wells that are some two months from completion, BP faces costs that may reach US$37 billion, absorbing three years of cash flow. The company also faces a criminal and civil investigation in the US into the disaster.

"There is a 10 per cent to 20 per cent chance of BP being taken over," said Gudmund Halle Isfeldt, an Oslo-based analyst. "The only real candidate, in size and with similar operations globally, would be Royal Dutch Shell." Hayward will promise to maintain the dividend at US56c a share this week, the Times, of London, said. That would put the ratio of payments to the share price at 9.7 per cent, the highest yield among 18 of BP's peers.

A BP-Shell tie-up has been discussed by the companies more than once. BP and Shell talked about merging in 2004, according to a 2010 memoir by John Browne, the former BP CEO. At the time, the companies talked about divesting BP's refining and marketing operations to satisfy possible anti-trust concerns.

In addition to being the largest oil and gas producer in the US, BP is the biggest operator in the Gulf of Mexico, where it holds more than 500 leases and pumps 450,000 barrels of oil a day. The company plans 10 projects in the Gulf during the next five years, more than other regions of the world, according to a BP presentation.

The US Justice Department is investigating whether any criminal or civil laws were violated in the spill, Attorney-General Eric Holder said on Wednesday, the same day President Barack Obama called the spill "the greatest environmental disaster of its kind in our history".

Obama has dropped plans to open waters off the coast of Virginia to drilling, cancelled a lease sale in the Gulf and suspended the permit process for Shell's planned wells off Arctic Alaska. He said new safety rules will be imposed on drilling.

BP has spent US$990 million trying to stop the gusher on the seabed about a mile below the surface and on cleaning up oil from the Gulf. Payments to landowners, hoteliers and fisherman claiming losses from the spill will cause the bill to rise.

The cost for the Exxon Valdez tanker disaster in 1989 resulting from clean-up, fines and settlements has reached at least US$4.3 billion so far.

In the worst case scenario, where hurricanes, technological difficulties, or unforeseen problems thwart BP's attempts to contain the oil and seal the well, the leak could spout almost 4 million barrels of crude into the Gulf by Christmas, geologists and industry analysts reckon. The oil could suffocate fish and other marine life, damage shorelines along the Gulf Coast, sweeping around to Florida's Atlantic Coast, and harm the economies that are dependent on fishing and marine life. Toxic crude from the spill could remain trapped in layers of ocean water for decades, scientists say.

BP's market value, which surpassed Shell at the start of the year, has fallen behind Petroleos Brasileiro SA, Chevron Corp, and Russia's OAO Gazprom. Total SA, based in Paris, pumped 2.28 million barrels last year and is priced about US$9 billion less than BP on the stock market.

Hayward reduced BP's net debt ratio to 19 per cent in the first quarter from 23 per cent a year earlier, giving him greater ability to meet clean-up costs. The company has an AA credit rating from Standard & Poor's and made a record US$6 billion profit in the first quarter on US$73 billion revenue. Hayward has promised to clean up "every drop" of oil in the Gulf and on the shoreline from the well that has gushed up to 19,000 barrels of oil a day, according to a government estimate.

- Bloomberg