BP (LSE: BP) has become the subject of takeover speculation once again during the past week as traders bet that BP’s larger peer, and the world’s largest oil company, Exxon Mobil will make an offer for the company.
A deal makes sense
Nevertheless, unlike previous takeover rumours, this one seems to have legs. Indeed, Exxon would be able to swallow BP whole without much trouble, and the company has a reputation for pouncing on smaller, distressed peers.
And Exxon is one of the few oil majors that could realistically make a bid for BP.
You see, there are two main reasons why BP has not succumbed to a takeover during the past few years. Firstly, any company acquiring BP would be paying to accept the legal liabilities arising from the Gulf of Mexico disaster.
Secondly, BP’s buyer would have to deal with the Russian government. The Kremlin is unlikely to let any old company get its hands on BP’s near 20% stake in Rosneft.
This issue won’t be a problem for Exxon. Exxon’s CEO Rex Tillerson has a good relationship with Russian President Vladimir Putin — Tillerson was awarded the Order of Friendship by Putin last year. So, Exxon is one of the few companies that is welcomed by the increasingly hostile Russian government.
What’s more, Exxon’s deep pockets mean that the company will be able to meet BP’s additional legal liabilities arising from the Gulf of Mexico disaster.
It’s more than likely that regulators will demand the sale of some of BP’s assets if it is acquired by Exxon, due to competition concerns. These asset sales will help pay for BP’s legal liabilities. In addition, Exxon has plenty of experience dealing with the US legal system, which could help the enlarged Exxon-BP keep a lid on legal bills.
Pushed into a deal
Additionally, Exxon could be pushed into doing a deal with BP. Exxon’s management is facing pressure from shareholders to boost its rate of growth.
Exxon’s production averaged 4m barrels of oil per day last year and the group is struggling to fund enough new projects to keep production growing –BP could be the answer.
With over 50 deepwater oil projects under development, BP is gearing up for rapid growth and owns some attractive assets. These projects could produce an additional 900,000 barrels per day of oil equivalent production by the end of the decade.
The bottom line
Overall, there’s a strong argument to support a BP-Exxon merger. Exxon is looking for bolt-on acquisitions to boost growth, and BP looks to be a great fit.
Exxon is one of the few companies that could acquire BP and not worry too much about the group’s huge legal bill or exposure to Russia. Further, BP’s valuation is depressed — on a per barrel of reserves basis, the company is the cheapest in the big oil sector.
However, as of yet no deal has been announced and there’s no guarantee that an offer will be made.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.