BP is 'takeover target' as share price plummets
Published 02/06/2010 | 05:00
FEARS that oil may continue spewing into the Gulf of Mexico for another two months wiped £16bn (€18.7bn) off BP's market value yesterday and sent the cost of protecting its bonds soaring.
Analysts said BP's existence may also be in danger as the plunge in the share price makes what was once Britain's biggest company a takeover target.
Reputational damage and the unknown financial cost of the spill would deter suitors for the moment, but a takeover is now more likely, they added.
"Given the collapse in the share price and the potential for it to fall further, we expect that it (BP) could become a takeover target -- particularly if its operating position in the US becomes untenable," Dougie Youngson, an analyst at Arbuthnot Securities, said.
Yesterday's fall means the company's value has plummeted by more than a third, or £46bn, in the six weeks since the April rig explosion which killed 11 employees and heralded one of the decade's worst and most public environmental disasters.
Shares in BP fell close to 17pc yesterday, hitting their lowest point in over a year as the London market opened for the first time since the failure of its latest attempt to stem the biggest oil spill in US history.
The drop meant the British oil group was worth about £77bn versus £93bn on Friday and £123bn prior to the explosion that unleashed the oil from a well head 1.6km below the sea's surface.
The cost of protecting the company's debt against default rose sharply yesterday, with five-year BP credit default swap widening by 71 basis points to 173 basis points.
BP's debt is AA rated, close to the highest rating given to non-sovereign bonds. However, traders of debt derivatives pushed the perceived risk of default out to a level similar to that of a much smaller oil company, such as Spain's Repsol, or one of Europe's weakened banks.
Yesterday, BP outlined plans for another, riskier attempt to contain the spill, but the failure over the weekend of the "top kill" option to plug the well with heavy fluids meant attention was increasingly switching to the drilling of two relief wells, which won't stop oil leaking until August.
"Last weekend's operations for me were really the last opportunity for them to kill the well and what they're proposing to do next has a real potential for making the situation worse," said Mr Youngson.
BP now hopes to deploy a containment cap later this week and pipe leaking oil up to the surface. The latest plan is risky because it involves cutting pipes which are damaged, and whose damage is currently limiting the flow of oil into the sea.
"The word August is getting used quite a lot now by the BP management," said Alan Sinclair, analyst at Seymour Pierce. Two more months of oil leaking into the Gulf would worsen the environmental catastrophe, as might hurricane season, which began on Tuesday.
The total financial cost of the response now stands at $990m, up from a $930m estimate on May 28, while almost £46bn has been wiped off BP's market value so far.
"Although we believe that the market has overreacted to the bad news, we feel that there will be little stimulus to the shares while the leak continues to pump oil into the sea," said Panmure Gordon analyst Peter Hitchens.