Zacks: March 14, 2017
Shares of BP plc BP rallied after a London-based newspaper claimed that ExxonMobil Corporation XOM is looking to place a takeover bid for the British energy group.
A bid for BP cannot be ignored as these rumors about ExxonMobil’s interest have been doing the rounds for years. However, analysts believe that such a deal is unlikely as it does not seem to be a strategic fit.
The merger would create a company too big and complex to be managed. The weak oil price environment has resulted in just one big deal – Royal Dutch Shell plc’s RDS.A $54 billion purchase of BG Group Plc in 2016. Other key oil players in the industry have embarked on smaller acquisitions as they intend to preserve cash and maintain their balance sheets. Though oil prices have increased from the 12-year lows of last year, companies are still uncertain if the recovery is sustainable.
Texas-based ExxonMobil has one of the strongest balance sheets in the industry. The company hasn’t signed any major deal since the wave of oil-major consolidation in the late 1990s. In contrast, BP’s market capitalization has decreased considerably since 2010 oil spill in the U.S. Gulf of Mexico forced it to reserve over $54 billion for compensation and penalties.
In 2010, though BP had the same market capitalization as Royal Dutch Shell, its production was much higher when compared to the latter. Today, BP’s value of $112 billion is almost half that of Royal Dutch Shell. It’s even further behind ExxonMobil, the world’s most valuable oil company worth $337 billion.