The ignominies continue to pile up for BP as its share price continues to plunge (it’s now down more than 40 per cent since the April oil-rig explosion and at the lowest level since April 1997) and continuing oil-leak woes.
And scenarios that would have been unthinkable even just weeks ago are being taken seriously.
First up, StanChart has fanned the flames of BP takeover speculation with a Thursday note on what it called the “persuasive economics” of a PetroChina offer for BP.
While StanChart acknowledged the potential for a “full dose of scepticism” on the deal as a “real-world proposition”, it justified its argument on widespread media speculation about a possible takeover of BP.
Indeed, with the share price down another 30p to 361p on Thursday morning – the oil major is now worth more dead than alive, as AP notes.
StanChart calculates that the total oil and gas reserves of a combined PetroChina-BP would be 73 per cent and 187 per cent larger, respectively, than those of ExxonMobil and Royal Dutch Shell.
Such a deal, according to StanChart, would “make economic sense” and massively boost PetroChina’s earnings per share, helping transform a low-growth company into a global oil champion.
As Reuters reports, StanChart sees no overlap in assets between the UK and Chinese oil giants, and PetroChina would pay less than $7 per boe (barrels of oil equivalent) for BP’s reserves, which was seen as cost-effective, the bank said, adding that, in addition, BP’s output would hedge a third of China’s oil imports.
All these incentives would eventually make a PetroChina takeover an “attractive exit opportunity” for BP’s shareholders, StanChart said, while also highlighting some uncertainties about such a deal:
“The key uncertainty is the size of BP’s liability from the Gulf of Mexico accident, which could go as high as $40 billion. This should not form a stumbling block, given the limited short-term impact on cash flow”…
“We expect China would support such a deal, while regulators in the United States may raise antitrust concerns. While we cannot rationalize any argument that the deal should be blocked on grounds of national interest, local politicians may take a different view.”
Some energy analysts however believe that political opposition in both the US and UK. would prevent any takeover by PetroChina. As energy analyst Wang Aochao at UOB-Kay Hian in Shanghai told Bloomberg:
“It’s all well in theory, but I can’t see this ever happening …Chinese oil majors prefer to buy smaller oil companies or stakes in ventures abroad and that’s what they’re doing.”
All the while pressure mounts on BP to withhold its dividend payment and worried shareholders get – well, more worried, and US politicians and regulators – from the top down – get angrier and angrier.
To add to the indignity of it all, BP bonds and CDS are now trading in junk territory, Bloomberg reported on Thursday, noting:
BP’s $3bn of 5.25% notes due in 2013 fell as low as a record 89.94 cents on Wednesday, pushing the yield to 7.57 percentage points more than Treasuries. The spread compares with the average of 7.26 percentage points for junk bonds, Bank of America Merrill Lynch indexes show. The cost to protect $10 million of London-based BP debt for one year with credit-default swaps almost doubled to $512,000, according to CMA DataVision. It was $29,000 on April 30.
Indeed, with the prospect of no dividend and a cheap – cheap – share price, BP is beginning to look like a classic growth stock, in the view of FT personal finance commentator Matthew Vincent. He concludes:
Some ‘value’ fund still managers see too much risk in these unknowns, even with the shares trading on a trailing 12-month yield of 9.49 per cent and a price/earnings ratio of 5.54. But it’s perhaps no wonder growth fund managers feel more comfortable taking a punt. BP now looks an awful lot like an early-stage technology or biotech start up.
Related links:
A further indignity for BP? – FT Alphaville
Danger! Knife falls even further – FT Alphaville
Danger! Falling knife – FT Alphaville
The value case for cutting BP’s payout – FT Editorial