This morning’s trading update from BP (LONDON:BP) managed to surprise the market and beat expectations with profits beating expectations, coming in at $2.6bn, above the consensus of $1.2bn.
The effect of the sharp falls in the Oil price appears to have been overestimated after we hit lows of $45 in early January, but they weren’t there for very long, as since then oil prices have averaged nearer $55, and are now trading well above $60 a barrel.
To put this morning’s number into perspective profits are still much lower from a year ago, down by 39%, but as with anything it’s all about expectations and these were low, with most in the market focussed on BP’s potential as an acquisition target.
The extent of the beat does appear to have caught a lot of people by surprise, but there is a case for arguing that it probably shouldn’t have.
For the past 5 years the company has been on a ruthless efficiency drive as a result of the 2010 Gulf of Mexico oil spill, disposing of assets, cutting jobs and driving efficiencies, while as recently as January the company announced a raft of further job losses and wage freezes, as it continued to drill down on costs.
Only last week the company sold its North Sea gas pipeline system for £324m to a private equity buyer. It also is looking to dispose of another $2bn worth of US assets in the next 12 months.
This means the company was already well ahead of the curve when last year’s oil price fall started to hit revenues meaning that the company was already that much more prepared and lean, simply because it has needed to be, to navigate the events of the last 5 years.
The next question now is whether this number makes BP a more attractive target for an acquisition given the British Governments statement earlier this week that it is opposed to the idea, and would try and discourage it.
Putting aside the fact that even if BP were in play the British Government wouldn’t be able to do much to prevent a bid, the prospect of one remains unlikely given that the only bidder with pockets deep enough would be Exxon Mobil (NYSE:XOM), and given the overlap in the two companies’ respective business models, that seems unlikely.
To channel Jessie J, it’s all about the price tag, and unlike Jessie J we can’t forget about the price tag, because it is about the money.
On that basis alone the numbers are eye wateringly high. BP’s market cap is currently about $125bn, and with any normal bidding process any bidder would have to pay a premium, which would have to put any bid in the region of $150bn or above.
That puts it in the AOL/Time Warner, Vodafone/Mannesmann bulge bracket and neither of these had a particularly great outcome.
Throw in litigation concerns and the continued uncertainty about BP's Macondo Gulf of Mexico liabilities, which are likely to overhang the business for several years to come and the uncertainties and final cost, are difficult to quantify, given that the longer term damage to the Gulf coast is still being assessed.
The US oil giant does have experience of its own in respect to litigation costs, given what happened in Alaska in 1989 in Prince William Sound, and over which it is still involved in litigation over 25 years later.
On this basis alone this holds lessons on BP's liability for the Gulf of Mexico spill which was 20 times bigger than the Exxon Valdez, and is likely to be an additional consideration in weighing the potential for any offer.
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