BP PLC's (NYSE ADR: BP) share price has plunged by more than one-third, as the company has struggled to contain the Gulf oil spill. Now, the company is being rumored as a takeover target as its stock has yet to find a floor.
BP shares have tumbled 36% since the company's leased drilling rig Deepwater Horizon exploded on April 20. The company has lost a third of its market value – $75 billion – stirring rumors that there could be acquisition interest. About $17 billion in losses came on Tuesday alone when the stock plunged 15%.
"There is a 10% to 20% chance of BP being taken over," Gudmund Halle Isfeldt, an analyst at DnB NOR ASA, told Bloomberg News. "The only real candidate, in size and with similar operations globally, would be Royal Dutch Shell [PLC (NYSE ADR: RDS.A, RDS.B)]."
BP's drastic market value loss could make it cheap enough to attract buyers, but some analysts say the total cost and implications of the spill are too vague to justify a commitment.
"We're getting into share price territory where analysts speculate about takeover possibilities, because the loss of market value is much greater than the estimated 'worst case' costs," Ivor Pether from Royal London Asset Management told Bloomberg. "But there aren't any buyers at this point because the near-term uncertainty is so high."
BP took another hit Tuesday when U.S. federal authorities announced they were opening criminal and civil investigations into the explosion.
U.S. Attorney General Eric Holder said in a press conference that there was "a wide range of possible violations." Legal experts say the focus of the criminal investigation will be to find out if any individuals made false statements and if the company demonstrated negligence. A civil case could be brought for violating the Clean Water Act.
"We will closely examine the actions of those involved in the spill," said Holder. "If we find evidence of illegal behavior, we will be extremely forceful in our response."
The criminal investigations heat up the government's battle against BP. The Obama administration has been criticized for letting BP control information about the spill and how to stop it, and has responded with calls to tighten oil industry regulation and increase company liability.
The investigation could damage the company's reputation enough to further fuel takeover speculation. Although BP's balance sheet is strong, U.S. backlash may be stronger.
"Financially they can survive this crisis, but politically they will be punished for a very long time," Fadel Gheit, oil analyst at Oppenheimer & Company, told The New York Times.
Containment Efforts Continue
The exact amount of oil released into the Gulf of Mexico is unknown, but experts estimate the total is around 20 million to 40 million gallons. The "top kill" strategy attempted this weekend, which involved pumping mud and liquids with twice the density of water toward the leak to reduce the well's flow rate, was no match for the intense pressure of the oil surging into the Gulf.
Relief wells are the best solution but will take up to two months to complete. Analysts have estimated the spill could cost up to $37 billion – between $15 and $23 billion for cleanup and $14 billion in claims. The company has already spent $990 million to try to stop the leak.
The spilled oil was spotted nearing Florida's Pensacola Beach this week, making Florida the fourth state hit, joining Louisiana, Alabama and Mississippi. Local fishermen have been given some money from BP already, but not enough to compensate their losses.
The latest attempt to contain the gusher has sent robots under water to cut the broken pipe so engineers can cap the well's opening. The risky endeavor temporarily increases the leak's flow by 20% – 100,000 more gallons daily on top of the 500,000 to 1 million gallons already leaking.
The maneuver hit a snag Wednesday when a saw cutting the thick pipe got stuck. Crews were aiming chemicals at crude spilling out of the new cut, but hoped a cap could be placed on the leak later Wednesday.
Energy Sector Struggling
A total market-cap loss of $100 billion has hit the five companies associated with the oil spill: The rig's owner Transocean Ltd. (NYSE: RIG); oilfield service provider Halliburton Co. (NYSE: HAL); Cameron International Corp. (NYSE: CAM), responsible for the faulty blowout preventer; Anadarko Petroleum Corp. (NYSE: APC), part-owner of the well; and BP.
"Not surprisingly, companies directly implicated in the spill have performed poorly, especially since April 28, though companies with 'heavy exposure' to the Gulf have performed even worse," Arjun N. Murti, an analyst with Goldman Sachs Group, Inc. (NYSE: GS) said in a note to clients.
The Standard & Poor's 500 energy sector was down 11.8% in May. President Barack Obama's six-month moratorium on offshore drilling will continue to hurt the sector, especially oil services firms like Baker Hughes Inc. (NYSE: BHI) and Schlumberger Ltd. (NYSE: SLB).
Obama has also killed plans to allow drilling off the coast of Virginia, canceled a Gulf lease sale and put Shell's plans to drill wells off Alaska's coast under review, further hurting oil companies.
"Given that the de-bottlenecking of the deepwater was a key driver of their growth, this and the risk of a congressional stampede impeding progress in the Gulf of Mexico is a substantial setback for the market psychology," David Havens, an analyst with Sterne Agee, said in a note to clients.
News and Related Story Links:
- Money Morning:
Gulf Oil Spill Could Cost BP More Than Half its Net Income
BP at Risk as Share Plunge Fuels Takeover Speculation
- The New York Times:
Cleanup Costs and Lawsuits Rattle BP's Investors
- Money Morning:
Shell Grabs Crucial Shale Gas Deposits With $4.7 Billion Deal
- Money Morning News Archive:
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Spill takes a big bite out of energy shares
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- Money Morning:
Schlumberger's Acquisition of Smith the Latest Evidence of a Takeover Trend
- Money Morning:
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