BP Courting ‘Investors of Last Resort’

Ashby Monk

Times are bleak for BP and its shareholders. Oil continues to gush into the Gulf, company shares are down 50%, and executives are now increasingly concerned about an opportunistic takeover bid coming from a competitor. What to do?

Well, when the going gets tough, struggling firms often turn to SWFs. In a way, SWFs have become ‘investors of last resort’. This was clearly true back in 2007 when SWFs made huge investments in failing financial services firms. And now it appears to be once again true with BP:

“The company’s advisers are trying to drum up interest among rival oil groups and sovereign wealth funds to take a stake of between 5% and 10% at a cost of up to GBP6 billion.”

It’s pretty clear why BP is courting SWFs. But what’s less clear is why SWFs are entertaining the idea of (once again) bailing out a large, blue chip western firm in trouble. Off the top of my head, I can think of three reasons:

  1. I’ve heard more than once that smooth talking bankers (and perhaps now oilmen) make easy prey of naïve SWFs. In other words, there are those who think SWFs are prone to making investment blunders. This explanation is perhaps reasonable given some of the big losses SWFs have incurred in the past, but I still don’t buy it. SWFs are smarter and more savvy than these people give them credit for (at least in most cases).
  2. Yet another explanation is that SWFs are investing in these firms based on extra-financial criteria. In other words, they are looking to secure large stakes in these firms not to make profits but to gain influence, secure knowledge or access markets that may be in the national interest. I think this is a reasonable explanation, especially in the case of BP.
  3. The explanation I like most, however, is that SWFs simply have a different time horizon than other investors, which means that the short-term discounting of equity prices does little to dampen the attraction of the investment over the long-term; i.e. 10 years or more.

In any case, it will be interesting to see what transpires here. Thus far, news reports indicate that SWFs from Abu Dhabi, Kuwait, Libya, and Qatar are the main contenders for an investment in BP. Only time will tell if these ‘investors of last resort’ are making a wise investment or a strategic blunder.

4 Responses to “BP Courting ‘Investors of Last Resort’”

  1. 1 Victoria Barbary July 6, 2010 at 3:50 am

    This is all very interesting, and not really unsurprising in all honesty. I don’t think either of your first two points are really feasible, while your third is probably a contributing factor.

    You’ve discounted your first one, but the second doesn’t really ring true to me as a driving force behind such an investment. International Oil Companies like BP are not the force in the global economy that they once were, as they have suffered at the hands of the rise of State-owned oil companies, which have expanded aggressively in the last 5-10 years. I read in the Economist this week that “easy oil” – that which can be extracted cheaply – is increasingly out of bounds for IOCs as almost 90% of it is in the hands of state-owned oil companies. Why would, therefore, oil-rich nations seek to own a large share of BP for “influence”? Moreover, why would they seek large exposure to an asset that is positively correlated with their income streams is another question that one might want to ask.

    I think that the answer to both of these queries is something that you haven’t touched on, and yet is an increasing trend with SWFs is facilitating economic development and diversification through investments abroad. Since John Browne was Chairman of BP it has expanded into a multiplicity of new energy forms – both gas (which is a trend in all IOCs) and renewables. With gas being the new oil, if you like, and having a more stable price than oil, being able to tap into expertise of how to exploit gas fields, rather than burning it off, might be attractive to SWFs and their government owners. The expertise in renewables might also be attractive for Abu Dhabi SWFs who are looking to try to expand into that space and save MASDAR from going to the wall. On this note, their expertise might also be useful for those countries, like Libya, who have not yet realised the potential of their oil reserves, and would like to be able to tap expertise in traditional up- and downstream oil capabilities.

    This might not be such a bad deal for BP either, as it gets them into some of these “easy oil” reserves that they wouldn’t have otherwise got access to. This might mean that they could become less reliant on deep water drilling and thus able to distance themselves from the Deepwater Horizon disaster. Furthermore, given that energy consumption in the West is falling, or at best static, it might be more advantageous for companies like BP to reorientate themselves Eastward, where energy consumption is growing. I would also hazard a guess that given the fiasco at the Copenhagen summit at the beginning of the year, the fallout of the Deepwater Horizon disaster is less problematic for developing countries than the US, for example.

    Anyway, just a few thoughts for you to bat around.

    • 2 Sven July 6, 2010 at 4:15 am

      I thought SWFs were designed to move the oil economies of the Gulf region “Beyond Petrol”. If this was true, then (beyond sheer portfolio considerations) BP would only be interesting for an oil revenue fuelled SWF on the grounds Victoria mentions in here comment, i.e. continuing on John Browne’s path.

    • 3 Ashby Monk July 6, 2010 at 9:43 am

      Thanks, as always, for the comment, Victoria. You’re probably right that a BP investment by SWFs would not fall into the “influence seeking” category. That being said, I think your explanation still falls into the category of “extra financial” investing. When you say that the SWF is facilitating economic development, you are saying that the SWF is investing not for its own returns but for the benefit of the country generally. In my view, a SWF investing to secure expertise in renewables or gas is taking extra-financial criteria into consideration. As I said, these extra-financial criteria can range from influence to knowledge. Cheers!

  1. 1 Ireland Learns ‘Directed Investment’ Lesson the Hard Way « Oxford SWF Project Trackback on November 22, 2010 at 11:31 am

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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