Is Exxon acquisition of BP really likely?

london — BP’s shares surged the most this year after a London newspaper reported on rumours that Exxon Mobil sounded out major shareholders over a potential takeover.

While a bid for BP can’t be ruled out, reports about Exxon’s interest have been around for years and analysts from Macquarie Capital to Canaccord Genuity said a deal was unlikely.

“The report about Exxon and BP seems to be just a rumour because because there doesn’t appear to be an obvious strategic fit,” said Anish Kapadia, a senior research analyst at Tudor, Pickering, Holt & Co International. “It would create a company potentially too big and complex to be manageable.”

Exxon and BP spokesmen declined to comment.

Oil’s current downturn has resulted in just one big deal — Royal Dutch Shell’s $54 billion acquisition of BG Group last year.

There doesn’t appear to be an obvious strategic fit. It would create a company potentially too big and complex to be manageable Anish Kapadia, Senior research analyst at Tudor, Pickering Holt & Co

Others have preferred to do smaller acquisitions as they preserve cash and protect their balance sheets. While oil prices have increased from the 12-year lows of last year, companies are still unsure if the recovery is sustainable.

Still, Irving, Texas-based Exxon has one of the strongest balance sheets in the industry and hasn’t done a deal on such a large scale since the wave of oil-major consolidation in the late 1990s. In contrast, BP has shrunk significantly since 2010 oil spill in the US Gulf of Mexico forced it to set aside more than $54 billion for compensation and penalties.

As recently as 2010, BP had the same market capitalisation as Shell and produced more oil and gas. Today, BP’s value of $112 billion is about half that of Shell. It’s even further behind Exxon, the world’s most valuable oil company at $337 billion.

As well as the daunting scale of a deal, there’s potentially a poison pill. Any buyer might be forced to accelerate the payment of as much as two-thirds of the more than $20 billion in penalties levied on BP for the Gulf of Mexico oil spill, according to company filings.

“That will significantly add to the costs,” Kapadia said. “It may not be what someone would want to take on.”

That BP’s independence is even up for discussion shows the relative decline of a company that pioneered exports from the Middle East, helped start Alaska’s oil industry and led the exploration of the North Sea. — Bloomberg