Big Oil may be dusting off its M&A files on BG. The British gas company - which also owns valuable oil assets - has all the hallmarks of a bid target. Speculation has swirled around the bigger majors like Exxon Mobil or Shell. But BP could be the most tempted.
In truth, BG is the perennial subject of takeover talk. A string of recent production downgrades has spooked investors, however. And, now new bets are being laid after BG's chief executive unexpectedly resigned earlier this week. BG said it wants to "accelerate the creation and delivery of long-term value." That might include selling assets offshore of Brazil, the company's crown jewel, or perhaps selling itself.
BG, with a market value of £41 billion ($68.7 billion), is valued at a chunky premium to BP and Shell on an earnings basis. But it trades at the largest discount to its net asset value of its peer group, according to Deutsche Bank estimates.
Exxon, Shell and Chevron could pay cash and see their gearing go little higher than 40 per cent, according to RBC Capital Markets. The snag is that investors have oil companies on a short leash, demanding better returns and capital discipline. But as a company with potentially better growth prospects, BG's dividend yield is lower than its larger peers, and next year cashflow should improve.
BP is more than double the size of BG, and a deal would catapult the larger company nearly back up to Shell's market value of $258 billion. It would also dilute BP's dependence on Russia, which accounts for nearly a third of production, and give it a bigger presence in liquid natural gas. A UK all-share deal - BG and BP have similar investors - would be simpler than a cross-border transaction.
There are hurdles. BP is busy selling assets. BG shareholders might balk at the lingering legal risk in BP's US Macondo liabilities. Savings look limited: one fund manager quipped the only synergy is the letter "B". It's also not clear that BP's boss, Bob Dudley, has a mandate for big M&A. That BP might be considered a predator, however, shows how far it has come.
