Are BP shares a top FTSE 100 takeover target?

BP (LON: BP) shares have fallen by 10.5% over the past five years and sunk from 568p in mid-February 2023 to 499p today. The FTSE 100 oil major is a significant component of the index but could now be a buyout target.

As ever, there’s always a bigger fish.

BP shares: Q2 results and Looney exit

In Q2 earnings, BP’s profits fell sharply by 70% year-over-year to $2.6 billion — missing analyst estimates due to falling oil trading income and refining margins.

However, this underperformance was widely mirrored by competitors faced with the same comparators (the immediate aftermath of the start of the Ukraine War). And BP was still able to boost its dividend by 10% to 7.27 cents per share — and it also promised to repurchase $1.5 billion of shares over Q3.

But for context, in May the company slowed its quarterly buyback programme from $2.75 billion to $1.75 billion, sending BP’s share price down the most in one day since 2020.

Former CEO Bernard Looney enthused that the company’s ‘underlying performance was resilient with good cash delivery - during a period of significant turnaround activity and weaker margins in our refining business.’

But shortly after this mixed set of results, Looney was forced to admit that he had not been ‘fully transparent’ over intimate relationships with employees — and this was followed with allegations that he had promoted women who he had had a relationship with — leading to a shock resignation.

January FTSE 100 speculation

Earlier this year, Citigroup analysts speculated that Exxon Mobil or Chevron might consider a buyout offer for the FTSE 100 oil major — with a megamerger looking attractive on valuation terms. The analysts argued that the comparatively lower valuations suffered by European oil and gas sector stocks couldn’t be closed organically — that ‘markets are unlikely to close the gap themselves.’

They added ‘we look at the strategic imperative, financial accretion and political headwinds of either of the two US IOCs (Exxon or Chevron) potentially looking to try and acquire one of their key European competitors (BP, Shell or TotalEnergies).’

This was a view shared by M&G head of equities Michael Stiasny, who in January noted that he ‘would not be shocked to see a big name in the oil and gas or mining sectors subject to a bid, with companies like BP trading at a significant discount to their US peers.’

Further to this, BP shares have underperformed during Looney’s tenure — even if this was due to the investment needed for the start of its green strategy.

Indeed, Bloomberg data indicates that the FTSE 100 company’s shares rose by 15%, while Shell’s market capitalisation increased by 29% in this time. Much of this lower growth has been laid at BP’s increased focus on the green transition compared to peers — arguably solid long-term investments, but which have left the company trailing the competition.

RBC Capital Markets analysts have previously argued that the former CEO sold oil and gas assets (including Alaskan operations) ‘at poor points in the cycle and at relatively low valuations’ in order to fund renewables projects.

With Looney out and interim CEO Murray Auchincloss now needing to project calm — including a need to balance BP’s strategic pivot away from greener energy in February with some investor disquiet — Q4 could see the American titans consider a move. Auchincloss argued in Abu Dhabi a few days ago that ‘one person leaving does not change the strategy’ set out in February — but not everybody is convinced.

While acquiring the £85 billion company would be difficult even for a supermajor, it’s worth noting that the entire industry is one built on gigantic mergers; BP itself bought Amoco for $48 billion in 1998.

Of course, new 2021 takeover rules allow the government to block a buyout on national security grounds — and it’s hard to see the government keen to allow yet another important UK company to leave London without a fight.

FTSE 100 oil major takeover?

But the macroeconomic picture could make a BP takeover an attractive prospect for the American firms. OPEC+ members Russia and Saudi Arabia have cut production to the end of the year, and the cartel’s secretary general argues that demand could grow by ‘about 2.4 million barrels a day.’

Al Ghais has called underinvestment in the sector ‘dangerous’ — arguing that the industry will need close to $14 trillion of investment by 2045 to support the energy transition. With Brent still trading at elevated levels of circa $84/barrel, BP shares could well be a top FTSE 100 takeover target.

Past performance is not an indicator of future returns.