BP Shares Fall Amidst Speculation of Buyout Potential
BP (LON: BP) shares have experienced a significant decline of 10.5% over the past five years, dropping from 568p in mid-February 2023 to 499p today. This decline has led some to speculate that the FTSE 100 oil major could become a buyout target.
The company’s Q2 earnings report revealed a sharp decline in profits, with a 70% year-over-year drop to $2.6 billion. This underperformance can be attributed to falling oil trading income and refining margins, a trend that was also observed among BP’s competitors during the immediate aftermath of the start of the Ukraine War. Despite the decline in profits, BP was still able to increase its dividend by 10% to 7.27 cents per share. Additionally, the company has pledged to repurchase $1.5 billion of shares over Q3.
However, it is important to note that in May, BP reduced its quarterly buyback program from $2.75 billion to $1.75 billion, which caused the company’s share price to experience its biggest one-day drop since 2020.
Former CEO Bernard Looney praised the company’s “resilient” underlying performance and strong cash delivery amidst a period of significant turnaround activity and weaker margins in the refining business. However, Looney’s tenure came to an abrupt end when he admitted to not being fully transparent about intimate relationships with employees. This was followed by allegations that he promoted women he had been involved with, leading to his resignation.
Earlier this year, Citigroup analysts speculated that US oil giants Exxon Mobil or Chevron might consider a buyout offer for BP. The analysts argued that the relatively lower valuations of European oil and gas sector stocks could not be closed organically and that a megamerger could be an attractive option. M&G head of equities Michael Stiasny shared a similar view, stating that he would not be surprised to see a major player in the oil, gas, or mining sectors become subject to a bid, given the significant discount at which companies like BP are trading compared to their US peers.
During Looney’s tenure, BP shares underperformed, partly due to the company’s increased focus on its green strategy. While BP’s shares rose by 15% during this time, Shell’s market capitalization increased by 29%. This slower growth has been attributed to BP’s emphasis on the green transition, which, although seen as solid long-term investments, has left the company trailing behind its competitors.
RBC Capital Markets analysts have previously criticized the former CEO for selling oil and gas assets, including Alaskan operations, at low valuations to fund renewables projects.
With Looney’s departure and interim CEO Murray Auchincloss now having to navigate investor concerns while maintaining BP’s strategic pivot away from greener energy, Q4 could see US titans Exxon Mobil or Chevron consider a move. While acquiring the £85 billion company would be challenging, the oil and gas industry has a history of large-scale mergers. Notably, BP acquired Amoco for $48 billion in 1998.
New takeover rules introduced in 2021 allow the UK government to block a buyout on national security grounds. It is unlikely that the government would allow another important UK company to leave London without a fight.
The macroeconomic landscape could make a BP takeover an attractive prospect for American firms. OPEC+ members Russia and Saudi Arabia have reduced production until the end of the year, and the cartel’s secretary general predicts that demand could grow by approximately 2.4 million barrels a day. Al Ghais, the secretary general, warns that underinvestment in the sector is dangerous and estimates that the industry will require around $14 trillion of investment by 2045 to support the energy transition. With Brent crude oil still trading at elevated levels of around $84 per barrel, BP shares could emerge as a top FTSE 100 takeover target.
While past performance is not necessarily indicative of future returns, the current state of the energy market and BP’s recent developments have generated significant interest and speculation regarding the company’s future.
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