With no end in sight to the undersea oil gusher in the gulf and mounting
Some say that things could get even worse as the blowout on the ocean floor continues to wreak havoc and the price tag continues to mount. But many others say the sell-off is overdone, and that investors would be wise to buy shares at what could be bargain valuations.
Yet another possibility is a buyout by one of BP's bigger oil rivals – and here's who would be the most likely suitors:
First up is Exxon Mobil (XOM), which boasts a market size of around $270 billion. BP's market cap is now about $115 billion, making it considerably less than corporate titan Exxon. XOM just made a huge purchase of natural gas stock XTO energy, with a buyout worth $41 billion announced at the end of 2009. That makes a BP buyout tricky with all that cash tied up, but also proves that Exxon has the means to make a huge buyout if its leadership thinks it's in the company's best interest. There are plenty of Exxon stock problems right now, including recent earnings misses and refining woes, but a buyout could breathe new life into this oil giant.
Another potential suitor would be Royal Dutch Shell (RDS). RDS stock has a market cap of about $160 billion at current valuations. Just a few weeks ago, BP would have been neck-and-neck with Shell, but BP stock has slumped from about $60 at the time of the initial oil rig explosion in late April to $36.52 as of Tuesday's close. That's a decline of about 40% in about 30 trading days, and puts Shell significantly above its British rival. Shell just bought out Australia's Arrow Energy for $3 billion in March, showing it too is diversifying beyond its crude holdings as Exxon did with the XTO deal. But a BP buyout would add a solid oil business to its balance sheet -- if the company could digest a rival that until just a few weeks ago was about its equal in market size.
Last among western suitors is Chevron (CVX), though this stock is admittedly the least likely of the three. CVX stock is even smaller than Shell, with a market cap of about $145 billion at current valuation. Even at BP's beaten down pricing it would take quite a leveraged bet for Chevron to acquire the oil stock's operations in a buyout. And such a move would expose Chevron to significant losses if liabilities remained a problem due to continued flow of oil in the Gulf or consumer backlash. Besides, BP crude oil estimates from the disaster are slippery and it may be impossible to know the true extent and cost of the damage for months or even years. However, BP's core business is strong and Chevron would benefit from gobbling up a once-larger rival to expand its reach.
True, any buyout talk right now is simply wild speculation. There are no plans, formal or informal, for any rivals to take over BP and even though the company has lost a huge portion of its market cap it is still one of the Wall Street heavyweights.
But that's not to say buyout talk won't eventually step outside of speculation and into serious discussions. Just as no one would have imagined a BP buyout earlier in the year, who would have imagined that the oil spill six weeks ago would continue unabated this long?
At the rate of decline that this crude oil stock has seen, it's not outside the realm of possibility that a company could sweep in with a buyout offer if BP stock troubles continue to mount. Even Conoco Phillips (COP), one of the "smaller" oil stocks with a market cap of $76 billion, may eventually become a likely suitor if BP continues its rapid downward spiral.
Even with the liability of the gulf oil spill, a deep discount on BP compared with its value just a few months ago may be too much for a buyer like Exxon, Shell or Chevron to pass up.
As of this writing, Jeff Reeves did not own a position in any of the stocks mentioned here.