Exxon/BP Marriage Not Impossible, But Is It Probable?

Todd Shriber
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Here we go again. Just a few weeks after speculation swirled that BP was ripe for a takeover following the massive decay in its share price and market value in the wake of the largest oil spill in U.S. history, the takeover chatter is starting again. Speculators and rumor proliferators seemed to take a little break from from grasping at straws regarding which one of BP's rivals would play vulture and pick up the embattled oil giant on the cheap, but the speculation gained some credibility today when JPMorgan published a note naming Exxon Mobil and Royal Dutch Shell as legitimate bidders for BP.

Another analyst mentioned ConocoPhillips, the third-largest U.S. oil company, as a possible buyer of BP, but Conoco (COP) has balance sheet issues of its own and would be a more likely buyer of individual BP assets rather than the entire company. Given the unknown liabilities BP is facing due to the Gulf of Mexico oil spill, it is going to take an immaculate balance sheet to acquire this company. Exxon has a better balance sheet than Shell (RDS-A), though a BP/Shell marriage makes sense from an asset integration perspective and the two companies have a relevant history of discussing a possible merger.

The reality is that at this point, Exxon is probably in the best position to acquire BP. After all, the company knows a little something about effectively completing massive acquisitions that return value to shareholders. In its current form, Exxon is the result of a combination with Mobil, a rare example of a huge corporate marriage actually benefiting shareholders. Not to mention, Exxon knows a thing or two about dealing with disastrous oil spills.

These are all relevant issues to consider when mulling a possible Exxon takeover of BP, but the JPMorgan report is more of an academic exercise than it is a handicapping sheet on the odds of these companies finding their way to the altar. The report says BP is worth $74 per American depositary receipt based on a sum-of-the-parts model. That may be an accurate estimate, but with BP's U.S.-listed shares trading for less than $28 and the pesky specter of those unknown liabilities, Exxon probably wouldn't need to pay that much.

JPMorgan thinks Exxon would pay $132 billion for BP (BP), more than $46 billion more than BP's current market value. That deal would consist of $50 billion in cash, $32 billion in Exxon shares and another $50 billion for BP's downstream business, which the report assumes would be immediately spun off and returned to BP shareholders. JPMorgan says Exxon generates $11 billion to $15 billion in annual cash flow and could repurchase the shares used to acquire BP within several years.

At the end of the day, sure, Exxon (XOM) should be considered a legitimate contender for BP and Exxon's management team is probably astute enough to realize that BP has some great assets that can now be acquired at a reasonable price. Being astute cuts both ways and that means Exxon is probably smart enough to realize that waiting a few months means they could pick up a bankrupt BP for far less than $132 billion. A BP/Exxon marriage? Do not rule it out, but do not bet on it happening in the near-term either.