Analysis Of BP As A Take-over Target: Attractions, Disadvantages, And Probable Bidders
Attractions and Disadvantages
Write an essay and discuss both the attractions and disadvantages of BP as a possible take-over target, and identify the most probable bidders for BP. Give some examples of the problems that face these potential bidders in terms of political issues and managerial styles. Discuss whether a continuation of low oil prices, as seen in the first quarter of 2015, will accelerate any take-over bid, or would low prices be another barrier.
British Petroleum (BP) is a large UK based organization in global oil and gas sector. Although BP was one of the largest suppliers of oil and gas in US and European countries, recently the organization is facing several problems. The reservoirs in Gulf of Mexico account for major portion of the sources possessed by BP. However the explosions in wells of Gulf of Mexico, caused interruption in the process of oil extraction in this region. The deep water horizon oil spill not only impacted on environment of the region, but it caused financial losses for BP. Shuen, Feiler and Teece, (2014) opined that the explosions in Gulf of Mexico also impacted on long term business growth of BP in US. Recent reduction in price of oil also increased the financial losses of BP. Discussion on the situation indicates that BP needs to be acquired in order to retain its position in global oil and gas market. The current essay deals with analysis on suitability of BP for being acquired. The organizations which can acquire BP are also identified in this essay. The essay also contains discussion on the attractions and disadvantages for acquiring BP. Impacts of recent degradation in oil price are also discussed in the essay.
Presence in Gulf of Mexico: BP is known as one of the largest oil and gas producers in oil and gas industry Although the oil spill in Gulf of Mexico caused huge amount of loss for BP, still it is also one of the largest oil and gas producers in this region. In Gulf of Mexico region, number of leases possessed by BP is more than 500 (Bp.com, 2015). However, the organization also extracts more than 45000 barrels of crude oil in a day (Renshaw, 2015). Management of BP is also planning to expand its business activities in Gulf of Mexico region. The management is planning to initiate some new projects in Gulf of Mexico within next five years. If any organization acquires BP, it will also be able to expand its business activities in Gulf of Mexico region. It will be effective to increase profitability of the organization which will acquire BP.
Identifying the most probable bidders for BP
Advanced infrastructure of BP: Acquiring BP may provide the organization with opportunities of increasing share in global oil and gas market. BP operates in almost 80 countries across the world (Bp.com, 2015). The organization possess infrastructure to produce approximately 3.2 million barrel oil each day (Bp.com, 2015). Apart from this, the oil reserves hold by BP is equivalent to about 17523 barrels (Bp.com, 2015). Although BP possess 18 drilled exploration well in different parts across the globe, management of the organization is also giving importance on exploring new areas (Bp.com, 2015). It is estimated that about 47,000km2 new areas are going to be explored by BP in next few years (Jacoby, 2012). BP owns 14 oil refineries. These refineries are capable to produce about 1,721 thousand barrels of refined oil every day (ZHDANNIKO and James, 2015). The organization which will acquire BP will not only be able to access highly advanced infrastructure of the organization, but it will also have more 17,200 retail stores which are currently possessed by BP in different markets (Stephens, 2015). The discussion on infrastructure possessed by BP indicates that its acquirer will be able to increase its upstream and downstream capacity.
Asset of BP and strong performance in share market: BP posses about 13.9% share in UK fuel market (Shuen, Feiler and Teece, 2014). Apart from this, the organization also operates in Asian market. Share of BP in Chinese market is about 1.1% while the organization holds approximately 1.75% shares in the market of Kuwait (Renshaw, 2015).It is also evident that the organization which will acquire BP may become able to increase shares in European and Asian market. If any large organization such as Shell shows interest to acquire BP, it may lead to development of monopolistic market environment in global oil and gas industry. As stated by the margin of safety via a price to earnings growth (PEG) ratio of BP is only 0.6 (Stephens, 2015).The wide range of (PEG) ratio of BP indicates that price of the share will increase for long term. Aas, Buvik and Cakic, (2008) opined that the dividend of BP is also going to increase in future. It indicates that the total return of BP is going to increase although financial price of BP degraded due to oil spill in Gulf of Mexico region and low price of oil in international market, infrastructure of the organization is highly advance. The asset base possessed by BP is also quite impressive (Hilyard, 2012).According to Jacoby, (2012) BP is going to experience high growth in next few years irrespective of hike in oil price. It is evident that after acquiring BP, the investor will be able to control the stock market.
Although acquiring BP will enable an organization to access its oil reserves as well as advanced infrastructure, implementation of the strategy to acquire BP may also cause several problems for an organization. The Deepwater Horizon accident in Gulf of Mexico region not only caused huge financial loss of BP, occurrence of the accident also impacted on environmental sustainability of the region. All the activities related with clearance of oil have not been completed yet. The organization which will acquire BP will be liable to clean oil from Gulf of Mexico region. However the accident also impacted negatively on brand image of BP in US oil and gas market. It indicates that business of the organization may be affected in US in future. As US is one of the largest markets of BP, reduction in business growth in this sector, may affect profitability of the organization. However BP already spent huge amount of capital to minimize the impacts of oil spill disaster. It is also expected that BP may require paying about $13.7 billion for the accident. The organization which will acquire BP may need to pay the penalty. BP is a large organization. If another company acquires BP, size of the combined organization may become too large and it may violate market regulations the acquirer may also be restricted from exploring arctic regions due to sanctions on Russia by European countries.
As BP is one of the largest organizations in global oil and gas industry, several organizations working in the industry will be interested to acquire BP. Although acquiring BP will be effective to increase share in different market, implementation of such strategies may also lead to generation of several problems. The probable bidders of BP are large organizations such as Shell and Exxon Mobil. However the China based organization Petrochina can also be considered as one of the most probable bidders for BP.
Shell can be considered as the most probable bidders for BP as both the organizations tried to work in partnership with each other. If Shell acquires BP, it will be able to control prices more effectively. However acquiring BP will also be effective to increase Economies of Scale.
Exxon Mobil is another large organization in the oil and gas market of US. If Exxon Mobil acquires BP, size of the combined organization will increase significantly. It will also be able to empower Exxon Mobil so that the acquirer can control global oil and gas industry. It is also evident that Exxon Mobil will also gain control over stock market after acquiring BP. However complexities may arise if activities of joint organization affect competitive environment in market.
Petrochina can be considered as one of the probable bidders of BP. Although BP possess significant share in markets of Europe and US, share of the organization in Chinese market is not high. In 2004 both the organization focused on development of partnership. If Petrochina acquires BP, it will be able to use its oil reserve. However it will also be effective to strengthen presence of the organization in global market.
Liabilities of Oil spill in Gulf of Mexico: The accidents in Gulf of Mexico caused huge environmental effects. Analysis on the incident indicates that BP crossed the limit of oil spill as per US law (Beshears, 2013). BP will not only be penalized due to occurrence of such incidents, its share may also reduce in this market. Due to unlimited liability of the incident related with oil spill, share price of the organization may decrease. Analysis on the compensation packages declared by BP after the accident indicates that the compensation policies are not clear and it may not be adequate to reduce negative impacts of the incident. The organization which will acquire BP will be liable to eliminate the environmental impacts of oil spill.
Sanctions on Russia: Due to Russia’s activity in Ukraine, European countries are not showing interest to conduct any business activities in that country (Europa.eu, 2015). As BP possess huge amount of oil reserves in Russia, its exploration activities may be affected due to sanctions over Russia. Analysis on the financial performance of BP indicates that the organization experienced sharp fall in profit during the period from July to September. The profit of BP reduced approximately 21% as it stopped its activities in Russia (ZHDANNIKO and James, 2015). Profitability of the acquirer may be reduced due to sanctions on Russia.
Complexity of the acquisition process: The management of BP may show interest to operate independently. It may restrict the acquirer to utilize infrastructure of BP effectively. However management of the acquirer also needs to develop business strategies in such way so that profitability of the organization does not reduce significantly. The acquirer also needs to ensure that none of their activities are violating market regulations.
Impact of low oil price on bids:
As price of oil per barrel reduced significantly in last few months, profitability of the organizations working in this sector is also reducing significantly. In 2014, the number of merger and acquisitions was higher than that in 2013 (Siddiqui, Haleem and Sharma, 2012). Analysis on acquisition strategies indicates that number of upstream and downstream units was higher than midstream acquisitions. Due to reduction in price, values of merger and acquisition deals are also reducing significantly. Degradation in oil price is also restricting the organizations from acquiring other companies in 2015 (Collett et al., 2012). However the organizations have shortlisted the companies which will be acquired. It is expected that the number of acquisitions will increase when price of oil will increase.
Conclusion:
Discussion in the current essay indicates that BP requires being acquired in order to reduce the negative impacts of oil spills in Gulf of Mexico region and low oil price. From the analysis it is evident that acquiring BP will be effective for an organization as it will get chances to expand its business activities in Gulf of Mexico region. The discussion also indicates that the acquirer will be able to access highly advanced infrastructure of the organization along with the large number of reservoirs across different locations. It is evident that acquiring BP will be profitable for long term growth of an organization. However analysis made in the essay also indicates that acquirer organization may face several difficulties including problems related with oil spills in Gulf of Mexico due to acquisition of BP. It indicates that the acquirer require paying huge cost to implement the strategy.
Although initially the acquisition will be costly, it will be beneficial for long term growth of acquirer. As the acquirer will get access to BP’s infrastructure and reservoir, profitability of the organization will increases with hike in oil prices. However it will also be ensured that the combined organization will not misuse its power to influence global oil and gas industry in order to retain competitive environment in market.
References
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