For months, speculation has been building that the London energy giant BP could be acquired by a competitor. Its lackluster returns and low share price have made it a tempting takeover target.
An activist shareholder had built up a significant stake in BP and was pushing the company to sell assets to raise cash, and industry analysts began to wonder how long it would take until the entire company was on the auction block.
The situation came to a head on Thursday when Shell, BP’s crosstown rival, was forced to issue a denial to media reports about merger talks between the two companies.
BP, which remains one of the world’s largest energy companies, is beginning to take steps to enhance its appeal to investors, including cutting costs and bolstering the oil and gas operations that produce the cash to fund the company’s large dividend payouts.
It may struggle, though, to shake off the impression that it is a troubled company in danger of losing control of its own destiny.
“We don’t expect that the statement today will stop this,” Ashley Kelty, an analyst at Panmure Liberum, a financial firm in London, wrote in a note to clients on Thursday, referring to Shell’s denial that it had approached BP for a possible takeover.
BP’s predicament is a major reversal for a company that was once one of the oil industry’s most adventurous and predatory.
At the end of the last century, BP’s chief executive at the time, John Browne, helped lead a merger wave with deals worth tens of billions of dollars for companies like Amoco and Arco, two large U.S. oil producers. Mr. Browne was also at the forefront of a foray by Western energy companies into Russia.
Under Mr. Browne’s successors, though, BP has been blown off course by a series of mishaps and worse, including the Deepwater Horizon drilling rig explosion in 2010, which caused a major environmental disaster in the Gulf of Mexico and killed 11 people. It still haunts the company, which continues to pay around $1 billion a year in damages.
“BP has lost its way in recent years,” wrote Mr. Kelty, who is also a former BP employee.
The most recent series of missteps followed the appointment of Bernard Looney as chief executive in 2020.
Mr. Looney began a radical reshaping of BP’s activities toward cleaner energy that some investors and analysts applauded. His plan included investing heavily in green energy while reducing oil and natural gas production.
The timing of this effort proved unfortunate. Oil prices, which had plummeted during the pandemic, rose after Russia’s invasion of Ukraine in 2022, making BP’s aims to reduce oil output a turnoff for investors.
At the same time, higher prices for materials and equipment and a rise in interest rates hurt some renewable projects like offshore wind, where Mr. Looney placed some big bets. More recently, the Trump administration has largely quashed offshore wind developments in the United States.
Already BP has taken write-offs of $1.1 billion in offshore wind projects in the United States.
“BP’s failed four-year transition experiment has destroyed market credibility and value,” Irene Himona, an analyst at Bernstein, a Wall Street research firm, wrote in a note in May.
Mr. Looney left in 2023 over a failure to disclose personal relationships with employees at the company. His successor, Murray Auchincloss, has tried to stabilize the core oil and gas business, but investors are not yet convinced that he understands the need for decisive change. As chief financial officer, he was one of Mr. Looney’s closest lieutenants and often joined him in presentations to investors.
BP once enjoyed a reputation as the home of skilled explorers for oil and gas, but rebuilding that business after years of starving it may not be easy.
Ms. Himona said that, in this decade, the company had been finding enough oil and gas to replace only about 40 percent of the reserves it pumped.
BP also at least temporarily lost a large portion of the oil and gas on its books when it put the 20 percent stake that it owns in Rosneft, the state-controlled Russian company, on ice in 2022 after the invasion of Ukraine.
UBS estimates that BP’s ratio of net debt to equity at the end of last year was a high 83.6 percent, compared with 21.5 percent for Shell.
“BP’s main issue is it’s stuck between strategies,” said Raghavendra Rau, a professor at the Judge Business School at the University of Cambridge. The company needs to come up with a “clear, consistent” approach, he said.
BP does appear to be listening, possibly with nudging from an activist hedge fund, Elliott Investment Management, which has bought a substantial stake in BP and is pushing it to focus on its most profitable operations and sell off other units to reduce debt.
Along with bolstering the oil business, Mr. Auchincloss has begun a program aimed at reducing thousands of jobs and accelerating asset sales, including its Castrol lubricants business. “We are disciplined about where we invest and are shifting capital to the highest-returning projects,” said a spokeswoman.
Because both BP and Shell are listed on the London Stock Exchange, they are closely compared by investors, who may buy one company’s shares over the other’s.
“It is our perception that shareholders largely own Shell as a preference over BP,” analysts at UBS wrote in a recent note, citing BP’s higher debt burden and weaker operating performance of late.
Analysts say expected downward pressure on oil prices could work against BP because the company’s earnings depend strongly on petroleum production.
Shell, by contrast, has methodically built up one of the world’s largest liquefied natural gas units, valued by UBS at $86.5 billion. And Exxon Mobil has taken the leading position in Guyana, where oil output has grown rapidly.
Shell and BP produce comparable volumes of oil and natural gas, yet the market valuation of Shell, now about 151 billion pounds, or $208 billion, is more than double that of BP at about £57 billion, or $79 billion.
Despite its problems, BP has important strengths. It is one of the major producers in the United States as well as in Azerbaijan, a major gas exporter, and Iraq.
But if it cannot shore up its stock price, which has fallen about 20 percent over the last year, it could look so cheap that it becomes an ever more tempting target for a takeover or breakup.
Shell has ruled out making a bid now without the invitation of BP’s board or an offer from a third party. But a takeover would create one of the world’s largest energy companies, with nearly a quarter of the global L.N.G. market, UBS estimates.
In fact, the theme of merging the two giants has come up before. In his book “Beyond Business,” Mr. Browne, the former chief executive, said he had talked about a deal with his Shell counterpart, Jeroen van der Veer, in 2004.
For now, though, Shell has said that it sees a takeover as a potential distraction from its focus on streamlining operations. In May, for instance, Wael Sawan, Shell’s chief executive, implied that buying back its own shares was a better option than most acquisitions.
“We want to be value hunters,” he said.” “Today, value hunting, in my view, is buying back more Shell.”
Stanley Reed reports on energy, the environment and the Middle East from London. He has been a journalist for more than four decades.
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