PetroChina-BP Deal Makes Sense

A takeover of British energy giant BP by PetroChina makes economic sense and will help transform the Chinese oil company into a global oil champion, Standard Chartered said in a research note on Thursday.

BP's plunging share price, which hit a 14-year low in U.S. trading on Wednesday, has made the British oil company a subject of takeover talk because of concern over its ability to meet the mounting costs of the giant Gulf of Mexico oil spill.    

With widespread media speculation on a possible takeover of BP, we examine various scenarios for a PetroChina acquisition," Standard Chartered said in the note. "We expect a full dose of skepticism on this as a real-world proposition, although we argue for the persuasive economics."

Standard Chartered said a takeover of BP by PetroChina would transform China's biggest oil and gas producer from a low-growth company into a global oil champion and boost its earnings per share significantly.

There was also no overlap in assets and PetroChina would pay less than $7 per boe (barrels of oil equivalent) for BP's reserves, which was seen as cost-effective, the bank said, adding that, in addition, BP's output would hedge a third of China's oil imports.

All these incentives would eventually make it an attractive exit opportunity for BP's shareholders, it said.

A combined PetroChina-BP would have oil and gas reserves that were 73 percent and 187 percent larger, respectively, than ExxonMobil Corp and Royal Dutch Shell, Standard Chartered said.

Standard Chartered also highlighted some uncertainties in its note.

"The key uncertainty is the size of BP's liability from the Gulf of Mexico accident, which could go as high as $40 billion. This should not form a stumbling block, given the limited short-term impact on cash flow," it said.

"We expect China would support such a deal, while regulators in the United States may raise antitrust concerns. While we cannot rationalise any argument that the deal should be blocked on grounds of national interest, local politicians may take a different view."