Analysts at investment bank Jefferies have suggested that Shell-BG could become bigger than ExxonMobil (NYSE: XOM.US) by 2018, reheating suggestions that Exxon might seek to protect its size advantage by acquiring one of the smaller oil majors, such as BP.
BPs market capitalisation of $125m is only a third of ExxonMobils $360m market cap, and the US firm would probably have the financial firepower to take control of BP if it chose to.
Legal woes a problem?
BPs current US legal troubles might deter ExxonMobil, which would probably be reluctant to get involved in BPs long-running and high-profile US legal battles. Exxons US roots mean it may not want to be seen to be profiting from a major US oil spill, albeit indirectly.
However, BPs battles are partly of its own choosing: I suspect that the vast majority could be settled quite quickly, if the firm wanted to smooth the way for a takeover deal.
The last major downturn in the oil industry, at the end of the 1990s, triggered a wave of major deals that reshaped the oil and gas landscape. Exxon joined with Mobil to become ExxonMobil. Texaco merged with Chevron, and BP acquired Amoco.
This time round, I believe theres a possibility that BP could be on the receiving end of a bid. For ExxonMobil, the attraction would be twofold.
Firstly, the US giant could cement its position as the largest publicly-listed oil and gas producer in the world.
Secondly, and perhaps more importantly, acquiring BP at a relatively depressed price would give a significant boost to Exxons reserves, which like those of many large oil producers, are being depleted from production faster than they are being replaced through exploration.
Is BP cheap enough?
BP currently trades on a historical P/E ratio of less than 10, but earnings downgrades caused by the falling price of oil mean that the firm trades on a 2015 forecast P/E of 17.
However, BPs earnings will recover strongly when the price of oil starts to rise and if Exxon did acquire BP, the US firms size and famed operational efficiency would be likely to improve the profitability of BPs operations.
In my view, BP is a reasonably good buy at todays price, regardless of any eventual takeover activity.
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Roland Head owns shares in Royal Dutch Shell. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.