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Tuesday, June 29, 2010
Tags: Energy news
BP Approaches Funds to Fend Off Takeover Bids: Source
British oil company BP has approached sovereign wealth funds with a view to securing a strategic investor to fend off takeover bids while it deals with its massive U.S. oil spill, a senior UAE source said on Tuesday. BP executives have held talks with a number of sovereign wealth funds (SWFs) including Abu Dhabi, Kuwait, Qatar and Singapore, the source told Reuters under condition of anonymity. "BP is seeking a strategic partner so it doesn't get taken over by other major oil companies such as Exxon and Total," the source said. "It's BP that is approaching the sovereign wealth funds not the other way round. They are the ones in need of a partner."
The Government of Singapore Investment Corp (GIC), one of two sovereign wealth funds in the nation, already owns around 0.7 percent of BP via a 122 million share holding, according to Thomson Reuters data. GIC was not available for comment. Temasek, another Singaporean state fund, declined to comment. "It's normal sovereign funds are looking into it. Most of them are probably not going to buy on the market," said a Middle East based investment banker familiar with the matter. "They would consider a PIPE investment . BP has 2 choices, either sell assets or raise capital and this is under discussion," he added. The size of any stake sale would be at least $500 million, the banker said. Another banking source familiar with the matter said talks were still preliminary and that BP had yet to offer blocks of shares to SWFs.
For BP, it would be important not to undercut existing shareholders by offering a special deal to SWFs, bankers said. BP had started marketing programs to convince funds that its share price is low enough to encourage them to buy on the market, he said. "If they get a special price they would invest," he said. "But if they do and it's not the same deal as for existing shareholders, it would be a PR nightmare for BP." Existing shareholders on Monday balked at reports that BP was looking to sell a stake, questioning whether it really needed a strategic partner. Libya and China were also among those interested, the second source said.
BP shares have lost more than half their market value since the spill in the Gulf of Mexico was unleashed on April 20, the result of an explosion on a drilling rig that caused the undersea well to rupture. Attempts to stop the flow have not worked, with BP pinning hopes on a relief well that should be completed in August. BP has said it hopes to raise $10 billion from asset sales this year as part of its plan to fund a $20 billion clean-up fund set up under pressure from U.S. authorities. Several newspapers reported interest this week among SWFs in buying some of BP's assets in the Middle East and Asia. Britain's Sunday Times said BP's advisers were trying to drum up interest among rival oil groups and sovereign wealth funds to take a stake of between 5 and 10 percent in the company at a cost of up to 6 billion pounds ($9.1 billion).
BP Says No Plans for Share Issue
BP PLC said Tuesday it has no plans to issue new shares to help pay for the Gulf of Mexico oil spill, giving its shares a further boost amid rumors of interest from sovereign wealth funds. BP spokesman Mark Salt said that BP "is always happy to welcome new shareholders or existing shareholders who wish to increase their shareholdings, but there's no current plans to issue new equity to anyone." The company's statement is good news for investors whose own holdings would be diluted by a larger stock base.
Recent reports have suggested that a number of Middle East sovereign wealth funds are considering purchasing a stake in BP, helping calm fears of a full takeover. BP declined to comment on "market rumor and speculation." Shares in the company were trading 2.7 percent higher at 342.35 pence ($5.20) in afternoon trade on the London Stock Exchange. Many analysts view the stock, which had at one point since the spill lost $100 billion in market value, as oversold. Royal Bank of Scotland on Tuesday upgraded the stock to "buy" from "hold", setting a target price of 455 pence. "Our base case scenario is significantly less pessimistic and in our view, the risk/reward profile of the shares is currently favourable," RBS analysts said in a note. They said that the operation of relief wells, due to occur around the middle of this month, will be a turning point for BP's shares. Stopping the flow of oil will cap the physical volume of the spill, reduce the daily costs being incurred, cool the political temperature and, if BP's share price remains excessively depressed, it could trigger credible merger speculation," they said.
BP May Need Radical Rethink
Hopes are rising that BP's first relief well will stop the flow of oil into the Gulf of Mexico earlier than expected. If it does, it might also bring forward the end of something else: BP as we know it. The disaster in the Gulf of Mexico comes after a string of other high-profile foul-ups. Assuming BP emerges from the acute phase of the crisis intact, its stock risks suffering an ongoing discount. Hence, analysts are postulating radical scenarios like the company being broken up or taken over.
BP might take some comfort in the market's capacity for forgiveness. In terms of a price/earnings multiple, BP's stock has traded at a premium to that of Royal Dutch Shell's for most of the past decade. BP's multiple dropped noticeably in the month following the Texas City, Texas refinery explosion in March 2005. But while its premium over Shell diminished, it wasn't extinguished, and began widening again in 2006. Indeed, the stock suffered a sharper downgrade in late 2002 when BP repeatedly missed growth targets. Other setbacks, such as the Alaskan pipeline leak in 2006, had little discernible effect. Meanwhile, the 2008 tussle over control of the Russian TNK-BP joint venture occurred as the financial crisis sent markets haywire, making it difficult to isolate its impact on BP's multiple.
But even the market's patience is finite, and as setbacks have mounted up, the clear trend since 2002 has been for BP's premium to Shell to narrow and then, since the Deepwater Horizon disaster, plunge to a deep discount. Moreover, since 2004, Shell's stock has been burdened with the legacy of the company's reserves-accounting scandal, helping BP to preserve its premium even after its own setbacks.
The Gulf of Mexico disaster undermines several core elements of BP's investment case: deep-water expertise, renewed focus on safety, financial flexibility, and political nous. This is doubly important because it has become harder for the majors to differentiate themselves. Back in 2000, the highest rated oil major's price/earnings ratio was, on average, almost double that of the lowest rated. That spread has compressed over the past decade as the majors as a group have struggled to demonstrate tangible benefits to being bigger. So far this year, excluding BP, the spread has averaged just 31%.
Looking beyond the immediate future, it's difficult to see how BP can craft a compelling investment case with a business-as-usual approach. A far-reaching management shake-up looks all but certain. But with BP's strategic position so undermined, it could require more radical action to recapture investors' imagination this time.
BP Would Be Barred From Offshore Leases Under Bill
June 30 (Bloomberg) -- BP Plc would be barred from new U.S. offshore oil and gas leases for as long as seven years under legislation being drafted by Representative George Miller, who cited the company’s safety and environmental violations. BP “has a flagrant history of taking risks to boost profits that has resulted in deaths of workers, destruction of the environment and economic chaos in local communities,” Miller said today in an e-mailed statement. Miller plans to offer his bill as an amendment to legislation that would overhaul drilling rules. President Barack Obama’s administration and lawmakers are considering penalties that would limit BP’s U.S. operations. In addition to BP’s Gulf spill, Miller cited a 2005 explosion at BP’s Texas City refinery that killed 15 workers and a 2006 pipeline leak that dumped 200,000 gallons of crude at Prudhoe Bay, Alaska, as reasons for his legislation. Serial violators ought to face consequences, and one of those consequences should be denying” BP and oil-producing companies “with this kind of record the right to drill in America’s offshore waters,” Miller said in the statement.
The U.S. also may revoke BP’s status as operator of producing wells in the Gulf, such as Thunder Horse, or of leases at Prudhoe Bay, David Pursell, a managing director at Tudor Pickering Holt & Co. LLC, a Houston investment bank, said this month. Congress also is weighing measures to bar BP from contracts with the Department of Defense and Environmental Protection Agency.
Miller said his legislation would block the Interior secretary from issuing offshore leases to a company that is determined to be a danger to workers and natural resources based on a review of records for all subsidiaries and partnerships. Spills in the Gulf, Alaska and the Texas City refinery explosion are “part of a pattern of BP’s history of reckless behavior,” Miller said.
N.Y. Fed Examines Wall St. Exposure to BP
June 29 (New York Times) -- The Federal Reserve Bank of New York has been examining major financial firms' exposure to BP to ensure that if the oil giant buckles under the costs of the Gulf oil spill, it won't put Wall Street or the global financial system at risk, two sources familiar with the matter told Reuters.
After poring over documents and asking banks about their exposure to BP over the past two weeks, the Fed found no systemic risk, and hasn't asked firms to alter their credit relationships with BP, the sources said.
"The Fed gave banks' exposure to BP a passing grade," said one of the sources on condition of anonymity.
Beyond's BP survival prospects, the Fed examination underscores market uncertainty about how the spill's staggering clean-up bill might affect Wall Street, a fragile economic recovery, or the multitrillion dollar energy market.
BP until recently had stellar credit ratings and generated $30 billion of cash from its oil and gas production and trading over the last year, making it a golden counterparty for many financial firms that trade in energy, including the largest Wall Street banks.
Since April, when it began trying to plug an oil spill that has spewed up to 60,000 barrels a day into the U.S. Gulf, the company has lost $100 billion in stock market value and suffered several credit downgrades.
The soaring liability risk raised concern in banking circles that the company's financial woes could spread outside BP, prompting the Fed's examination.
Should the unexpected happen, and BP file for bankruptcy, the economic stakes are huge, potentially affecting the portfolios of some of the world's top banks and funds, not to mention up to 23,000 American jobs, the price of oil, and the easy credit that banks give to big oil companies.
Fed and BP officials declined comment. Banks that trade with BP wouldn't comment publicly.