British Petro

8/2/2019 British Petro

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Introduction :

From the last ten years BP has got much support and acclaim for its proactive stance on environmental issues. The role of BP is usually

highlighted in stark contrast to companies that have been accused oflobbying intensively against efforts to mitigate the risk of global warming.we will also debate about global environmental issues and corporateresponsibilities in that respect the last ten years has also witnessed theemergence of much bigger and vast social agenda sometimes framed by theconcepts of corporate social responsibility. the discussion start off with the

brief overview of BP history with the current problems facing BP in the gulfof Mexico following the deepwater rig explosion which has caused what has

been described as the worst U.S ecological disaster ever, the company share

price has fallen steeply. this is also being said that could trigger at take overof the business by one of its big competitors such as Exxon Mobil, Shell, oreven petrochina.we will also discuss the conventional reasons for the takeover such as extracting cost or building extracting costs or buildingeconomies of scale along with the very real disadvantages, including thosespecial to an acquisition of BP at this time

Company profile :

The merger with Amoco in 1998,BP Amoco plc entered the scene amongthe world top three oil companies. Judging by merits such as marketcapitalisation of 203 billion dollar revenues of 148 US billion dollar andearnings 8.4 US billion dollar.BP was in year 2000 surpassed by the otheroil majors Exxon Mobil and shell group.BP also rank top three in terms ofdiscovered oil and gas reserves amount of 15.2 billion barrels of oilequivalents.BP products are on sale in about 100 countries and it has wellestablished operations in six continents. The company is active in 29countries with production operations in 23 countries.BP is the biggest

producer of oil and gas in U.S and the second largest marketer ofgasoline.BP got gas sales contract in more than 25 countries, refineries in 23countries and more than 28000 service stations.BP is also a major player inchemicals 58sites world wide and solar power revenues of 200 million U.Sdollar in 2000


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History and context:

British petroleum origin goes back to the early 20th

century and the discovery of oil reserves in Iran that lead to the

formation of Anglo-Persian to secure oil supplies for the royal navy in theist world war. In the period between world wars 1 and 2 the companyexpanded gradually through the construction of new refineries in Europeand Australia while exploration was carried out on a global scale inCanada South America, Africa and Papua. Following the Iraniannationalization process in the early 1950s the company was forced toexpand to other areas, notably the North Sea and Alaska. The Anglo-Iranian company was renamed The British petroleum company in 1954.Itwas largely for this strategic reorientation that BP was able to survive the

oil crisis of 1970s.From the mid 1970s , BP strategy of diversification ledto the inclusion of new business areas, such as minerals, coals andchemicals. Towards the late 1980s BP decided to change its strategy,concentrating efforts on its core activities in petroleum and chemicalsAfter the U.K govt sold the major shares of 31.5% in 1987 BP was notvery large company then and BP has vast debt and share price of only1.85.And even though Kuwait was insisted to sell the shares back toU.K govt.BP faced a financial crisis and the company did not give thedividend to its employees in 1992.Over the years 1992-1995,the global

work force was reduced from 117,000 to 56000 non core activities weresold out and BP focus on its core business:BP EX(explosion andproduction ),BP oil (refining and marketing ) and BP chemicals. Thisprocess was continued after john Browne was been appointed as CEO in1995 and BP has enhance its business in new regions like Columbia ,soviet union , the gulf of Mexico , Asia , Africa including new businessstreams of gas and power and BP solarThen the merger between BP and Amoco took place on dec 31st 1998 andit was the industrial largest merger in the history brought together twocompanies standing merits in the establishment of the world top threeenergy and petrochemicals company. Amoco has history of being theleader in the environment field.


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Porters Five Forces

Analyze The Five Forces Acting On Bp. Which Of Them Is

The Greatest Threat To The Company?

Threat of new entrants (High)

The threat of new entrants in the oil industry is strong. BP is a marketleader, but the strong growth of the industry, combined with the low costsand easy access to buyers are tempting for new comers.

Buyer Bargaining Power (Moderate)

Needs of consumers are high and there are no substitutes of motor fuels.That indicates a low degree of buyer power. Even though the brandawareness is high, because of the extreme budgets for marketing andadvertisement of oil companies, brand loyalty is low. Productdifferentiation is low. Considering the many existing players on themarket, this makes the buyer bargaining power moderate.


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Supplier power (high)

Considering the large size of suppliers, the number of suppliers, and theswitching costs for the independent retailers, we indicated that supplier

power is strong. The leading corporations are large and they doeverything from the fuel supply chain.There is a high degree of forwardinterigation within the industry.

Threat of substitutes (low)

Threat of substitutes of oil at the current moment is really weak mainlydue to the high prices of such. Solar panels and other alternative energyinclude high switching costs and long waiting time, which makes themunattractive to the consumer. Although bloodies and bioethanol alsoexist, availability is low.Even though the threat of substitutes is weak, BP has already taken itunder consideration and, as we mentioned, entered the market ofalternative energy. BP is investing huge amounts into developing new

technologies.

Rivalry (Moderate)

Even though there is a strong rate of growth within the industry, rivalryremains moderate due to the switching costs, size of competitors (oilcompanies) and similarity of those competitors. There is a high pricecompetition, as well as any other industry. Nevertheless, there are fewmajor market leaders and there is no place for small companies, whichcan not offer the same low prices.


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PESTEL Analysis OF BP

One way of planning your business is to undertake a PEST analysis. 1

PEST analysis involves looking at the Political, Economic, Socio-cultural and Technological factors that could affect your business.

Social Forces

Social forces include, for example, changing demography and education,etc. The population in Western Europe is relatively static, but the age

bands are changing. The number of older people, for example, is growingrapidly.


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Technological Forces

Technological forces are changing dramatically quickly. What effectswill this have on your production, marketing and distribution plans?Depending on your market, technology might either raise or lower entry

barriers for competitors - or completely change the industry. As the newtechnology and machinery has been introduced in the oil and gas industry

to get benefit, improve the efficiency and give healthy competition to therivals.

Economic Forces

Economic forces include the effects of inflation, interest rates, tax rates,exchange rates and the euro. Even governments have difficulty predictingwhat is likely to happen to these - and they try to control them!

Nevertheless, they will have a major impact on your business, especiallyif you need to borrow a large proportion of your working capital, or if

you are selling overseas

Environmental Forces

Environmental forces are becoming increasingly important as morepeople consider the consequences of continually interfering with theecological balance of nature. As a result, governments are legislatingmore to protect the environment and demanding less pollution

Political Forces

Political forces most obviously include government legislation forcing businesses to comply, for example, with health and safety, oremployment, or data protection requirements. These impose costs, butoften also provide opportunities.


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The Reasons Why BP In Talks Of Take Over :

BP failure to stop the oil leakage of millions of gallons of crude in to thegulf of Mexico leave the biggest oil and gas producer in the U.S for itsindependence fight.BP have been fallen down from 34 percent since thestart of deepwater rig explosion on the 20th April. That cause BP the lossof 40 billion pounds from the company value and because of this BP ischeap enough to attract acquisition interests according to the investorsThe decline in the market price of BP encourage the take over of it , whohelps manage about $4.5 billion at Robeco Group in Rotterdam, which

sold its BP holding last year. What matters now is how forceful BPsChief Executive Officer Tony Hayward is in tackling the disaster and theaftermath, Hoozemans said and it will cost 37 billion dollar With a

permanent end to the leak depending on so-called relief wells and thecompany also faces crimal and civil investigation in the U.S. The onlyreal candidate, in size and with similar operations globally, would beRoyal Dutch Shell BP's market value, which surpassed Royal Dutch Shellat the start of the year, has fallen to $115bn, lower than ExxonMobil at$280bn, PetroChina at $278bn and Shell at $159bn.Technically all of

these companies can buy BP but all of them know what they were buyingin an industry already fraught with regulatory and political risk.The huge and indeterminate cost of the oil spill clean-up, as well asdamages, fines and compensation - analysts' forecasts of the cash cost toBP have ranged up to about $20bn - could spiral into tens of billions ofdollars


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Takeover benefits :

According to commentators like Brealey and Myers (1991) have

commented that if takeovers, took place then companies have to targetedto create synergies in the form of economies of scale and of verticalintegration, complementarity of resources, enhanced efficiencies andimproved free cash flows. The others observers like Jensen and Ruback(1983) said about the takeovers by arguing that takeover will play as anexternal control mechanism by ensuring managers to not deviate fromensuring the maximisation of shareholder wealth. A sum up of thisargument is that the intent to increase shareholder value, for shareholdersof the target and the firm, who acquires can also drive the actual takeover

activity.During the 1980s and after that the globalisation has gained pace,takeovers have been happened as a means of increasing the influence,

brand name, and globally presence for corporations. In real, as theexample of too many Japanese companies has been formed, and many ofthem became well-known more for their takeover activities than productsand services (Kester, 2003).

Takeovers in regard to driving shareholder value :

We Derive from the premise of Agency theory, that considersshareholders as the principals and the managers their agents, and positsthat the latter may seem to play opportunistic in pursuit of their owninterests and contrary to that of the shareholders, takeovers have beenseen as a controlling mechanism to organize managers whose companiesare not performing well. moreover, during the 1970s and in thesubsequent years, the emergence of powerful institutional investorsformed a platform for takeovers targeted at increasing the stock price ormarket capitalisation, and in many instances, came to be seen as the sole

measure of corporate performance (Lazonik and OSullivan, 2000).Another reason of managerial takeover activity is defined by the free cashflow theory (Jensen, 1986), which describes that managers of firms withunutilised lending power and high levels of sustained free cash flows attheir disposal can be encouraged to undertake acquisitions (even ifunrelated) as an replacement to paying out cash dividends to shareholdersor using these funds in potentially low value-yielding and unprofitableinternal projects. In this situation, Jensen describes how during the 1980s,

buoyed by the substantial free cash flows, managers in the oil industry

undertook extensive diversification programs.


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Some relative examples of this are Mobil acquiring Marcor (retailing),Exxon taking over Reliance Electric and Vydec manufacturing and officeequipment, respectively, and Amoco buying Cypress Mines Mining.However, the theory further describes, using the substantive evidence of

the earlier examples, that very often, these takeovers may fail to create ormay even destroy value, reflecting a breakdown of internal control

processes and prevalence of organisational policies that are wastingresources. In such a scenario, these firms may themselves becometakeover targets for an acquirer aiming to provide better economic

purpose and enhance shareholder value. Hay and Morris (1991) refer tothis as allocational takeover and hold that the acquirer would aim toreallocate resources and make better use of them, thus improving the

performance of the target company post-merger.

Difficulties and problems of takeovers:

Taking the previous discussion further, we will discuss that there areexistence of a strong rationale and numbers of intentions behind takeoveractivity, both for managers and shareholders, even though it is notnecessary for them to be aligned on the reasons for transaction.

However, it is known from the previous evidence that the success oftakeover activity seems to suggest that in a most of cases, thesetransactions can fail to increase shareholder value when these are beenmeasured in terms of stock market performance, industry average returns,revenue growth post-merger and other key financial metrics (Pautler,2003).it is Depending on the benchmark chosen to define success, thereis a possibility that a takeover may be financial failure, particularly whenthe acquirer paid more money, but still be successful in a societal sense

by creating more diverse choices for customers, better or cheaperproducts, and reducing the use of resources in producing the output.Discussing the same conversation, Bower further describes that the front-end of the takeover process may have not received thorough thinking and

planning, leading to ineffective integration of assets and resources later.In such a situation, managers are faced with salvaging whatever they canin the post-merger period. It is said that the likelihood of bad ideas and

bad implementation can be significantly reduced if the acquiring firm hasexpertise with the type of assets it is acquiring. This implies geographicmarket extension and capacity expansion deals are more likely to succeedthan cross-border transactions done with the intent of corporate

diversification (Harbison et al, 2001).


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The main disadvantage that is evidence for the acquirer after the takeoveris to assuming all the liabilities of the target firm, which can create a

plethora of potential exposures and a need for adequate coverage(Hollyday, 1995).so that It has been, therefore, suggested that risk

managers should perform rigorous pre-acquisition due diligence into thetarget companys operations including regulatory compliance, legal, tax,and accounting issues. Beyond the implication of liability claims for thecurrent attractiveness of the target company, there can be long-termadverse impact on the companys profitability or it may have inadequatereserves and insurance coverage. Areas of liability can include first partyexposure, third party liability, statutory liability and regulatorycompliance.

The intent of driving shareholder value with BP as a takeovertarget :

In a takeover, the aspect of shareholder value assumes two perspectives-that of the acquiring and the target firm.Even though BP has spent up to US$10 billion in the previous years on

paying dividends to shareholders at an average of 9%, whenbenchmarked with a peer group of industry supermajors, the companyranks at the bottom on Total Shareholder Returns (TSR). In 2009, more

than a third of BPs shareholders voted against the long-term executivebonus plan and the 15% discretionary bonus proposed for directors, as thecompany had not met the TSR requirements previously specified in the

bonus plan.However, the motion was still approved by the companys board citingoperational performance as the reason for awarding executivemanagement (White, 2009). These recent developments indicate a highdegree of shareholder-manager or principal-agent conflict that has been

brewing within BP. Moreover, in the aftermath of Gulf oil spill, BPexecutives have been criticised for cutting corners on safety norms inorder to catch up on the delayed well schedule, meet their deadlines,which would have been linked to their bonuses. Such criticism has not

been for the first time and investigations into the 2005 Texas Cityrefinery had established a disturbing regularity of accidents unseenamong its peers (Steffy, 2010). It may appear from this that in theirquest to secure personal interests (bonuses), the management has

jeopardised long-term shareholder interests.


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Following the disastrous explosion on its rig in the Gulf, as the oil spillcontinued, shares of BP took a severe blow. By 3rd June, the company hadlost almost US$62 billion in market value and its m-cap stood almostone-third lower than that of its European counterpart, Royal Dutch Shell,stoking speculation that the latter may be contemplating a takeover onceagain (The Economist, 2010) given the sharp erosion in BPs share andan attractive acquisition price of ~US$6/barrel for its proven reserves.Further, given the strong conventional rationale of creating synergies and

new growth opportunities rapidly and increasing shareholder value,arguably, there exists a lucrative opportunity for an industry rival likeShell or any large oil and gas company looking to consolidate andstrengthen its position globally. The question that arises is: what

problems and disadvantages may exist for the acquirer?In answering the question honestly , one has to think about theimmediate, short-term, and long-term implications of the oil spill for BP.Understandably, the easiest to predict and assess but of limited utility indeciding about a takeover, has been the immediate term impact. Thecompany has announced on August 9th, BP agreed that they had already

spent US$6.1 billion, including in oil spill response, and in cementing thedamaged well, and settling initial claims and federal costs.In the short run , company forecasts, bearing the various results of thedisaster it would cost US$32 billion, and this amount will be gained byselling US$30 billion of non-core assets in the next eighteen months. It isalso estimated , BP will be liable to pay ~US$18 billion, at a rate ofUS$4300 per barrel, in fines according to the federal law for causing thespill. But , according to analysts and industry observers it is quite early todetermine the extent of liability and related damage claims, which can

also be rise sharply .

CONCLUSION

We have discussed about the BP and the current problem faced by the

company as a result of deepwater rig explosion in the gulf of mexicobecause of this problems there is talks and issues been raised of the takeover of the company by its rivals like shell . Exxon mobil and

petrochina.The talks of take over started beause of different reasons.the

main reason is that there is huge amount needed to stop the leakage andto clean the waterThe huge and indeterminate cost of the oil spill clean-


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up, as well as damages, fines and compensation - analysts' forecasts ofthe cash cost to BP have ranged up to about $20bn - could spiral into tensof billions of dollars and due to that lost BP share price has been fallen

References

DNR (Department of Natural Resources), Agricultural Research Service,USDA, and Netstorm Pty Ltd. (1999)Facilitator 1.2.17 Beta, A multi-objective decision support system.Presented at the 2nd International Conferencefor Multiple Objective Decision Support Systems for Land, Water andEnvironmental Management

(MODSS99), Brisbane.Drash, W. (2010) Hurricanes could derail August oil leak deadline, June4. Available at http:// www.cnn.com/2010/US/06/04/oil.spill.hurricanes/index.html?hpt=T1.Goodwyn, W. (2010) Previous BP accidents blamed on safety lapses.

National Public Radio, May 6. Available athttp://www.npr.org/templates/story/story.php?storyId=126564739&ft=1&f=2&utm_source=feedburner&utm

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%28NPR+Programs%3A+All+Things+Considered%29.


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Gerstein, J. (2010) The Gulf of Mexico oil spill by the numbers, TheDaily Green News blog, April 30. Availableat http://green.yahoo.com/blog/daily_green_news/333/the-gulf-of-mexico-oil-spill-by-the-numbers.html.

UPI (2009) BP-Alaska deals another spill, December 31. Available athttp://www.upi.com/ Science_News/Resource- Wars/2009/12/31/BP-Alaska-deals-with-another-spill/UPI-92901262277000/.Urbina, I. (2010a) In Gulf, it was unclear who was in charge of oil rig,June 6. Available at http:// royaldutchshellplc.com/.Urbina, I. (2010b) Despite moratorium, drilling projects move ahead,

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British Petro

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