LONDON — As the oil industry takes stock of Royal Dutch Shell's $70 billion move for BG Group Plc, one company has more to chew on than most.
BP Plc, Britain's most storied oil producer and prime mover in previous rounds of consolidation, is now thinking what was once unthinkable: that it could be next in the cross-hairs.
BP executives are concerned the company is vulnerable to an opportunistic bid, according to people familiar with the situation. In response, they've stepped up internal reviews of takeover scenarios and war-gamed defense strategies with advisers from firms including Morgan Stanley, said the people, all of whom asked not to be identified discussing a private matter. Exxon Mobil and Chevron, the two largest U.S. producers, are seen as the only realistic predators.
While some in the industry believe a move for the British company remains unlikely because of still-unknown legal liabilities from the 2010 Gulf of Mexico oil disaster, there's at least one good reason for Chief Executive Officer Bob Dudley to be paranoid. Before ruling themselves out by going for BG, Shell took a hard look at buying BP, one of the people said.
"As a matter of good practice, all companies have possible defense arrangements in place," BP spokesman David Nicholas said in an e-mail. "BP has made no changes to our long-standing arrangements in response to recent moves in the market."
Representatives for Exxon, Chevron, Shell and Morgan Stanley declined to comment.
"Exxon saw Shell do a deal and they would certainly be looking around, it's the same for Chevron," said Christopher Geier, partner in charge at Sikich Investment Banking in Chicago. "From a value perspective, it's possible BP could be ripe for a takeover."
That BP's independence is even up for discussion shows the relative decline of a company that pioneered exports from the Middle East, helped start Alaska's oil industry and led the exploration of the North Sea. In the 1990s, its acquisition of U.S. giant Amoco Corp. forced the rest of the industry to react.
As recently as 2010, BP had the same market capitalization as Shell and produced more oil and gas. Today, even before the BG deal is completed, BP's value at $131 billion is two-thirds of Shell's. It's even further behind Exxon, the world's most valuable oil company at $368 billion.
There's one clear reason, of course: the Gulf oil spill that left BP facing costs that may eventually exceed $40 billion, forcing it to shrink to survive. Since taking over in the months following the spill, Dudley's sold about a third of the company's assets and production has fallen from close to 4 million barrels a day in 2010 to a little more than 3 million.
Some have applauded the creation of a leaner, more profit- focused company but BP can no longer claim to be in the first rank of global oil and gas producers.
The slimmed-down BP still has plenty to attract potential acquirers, including strong deep-water prospects in Angola and the Gulf of Mexico, a refining business that's outperformed peers, and an industry-leading trading outfit.
Dudley has few options to make the company harder to buy. The traditional route is a defensive acquisition, a course of action the company is considering, the people familiar with the matter said.
However, any deal large enough to dissuade potential buyers would also represent a significant departure from Dudley's avowed focus on keeping BP to a manageable size.
A fresh buyback of shares has also been suggested by advisers, the people said. The company returned $8 billion to investors last year after selling its stake in a Russian business.
BP's shares have risen more than 6 percent since the Shell- BG deal was announced, outstripping the gains of European competitors including Total, Eni and Statoil.
Dudley declined to comment specifically on BP's plans or its vulnerability.
"On the industry as a whole, if oil prices stay down, we'll probably see more M&A," he said after the company's April 16 shareholder meeting in London. "If it stays lower for longer, the dynamics will change and companies will change their strategy."
Ironically, factors that have contributed to BP's difficulties could also keep it from being bought. The legal liabilities stemming from the Gulf spill are still open-ended as the company remains embroiled in U.S. litigation.
A U.S. judge is expected to rule on the size of federal fines BP must pay later this year, which could total $13 billion, and the company is being sued by several states. In any event, appeals are likely to keep the company's lawyers busy for years.
Russia is another question mark. After a complex 2012 deal to sell its stake in Russian venture TNK-BP, BP owns 20 percent of OAO Rosneft — the Kremlin-controlled oil producer that's subject to U.S. and European Union sanctions. While in the long run that brings a prime position in the world's largest energy- producing country, there are plenty of near-term risks.
Despite those pitfalls, BP's attraction for potential buyers isn't hard to quantify. The London-based company has the lowest enterprise value relative to the volume of oil and gas production of any of the six largest U.S. and European energy companies. Based on the current share price, its oil and gas reserves are valued at $7.49 a barrel, almost half Exxon's.
Discussions of likely acquirers for BP tend to return to the U.S. firm. Exxon, the world's largest private oil producer is on the hunt for acquisitions in order to compensate for difficulties expanding its own production, people familiar with the situation have said. With almost no debt and more than $200 billion in shares repurchased over the past 16 years, Exxon has the financial power for almost any conceivable transaction.
"The issue may not be that BP is weak, but that Exxon is that much stronger," said Scott Cockerham, a managing director in Houston at energy advisory firm Conway MacKenzie. "If Exxon thinks BP is a good fit, it can act on that assumption."
Nonetheless, plenty of hurdles remain to an Exxon offer. The Texan company's famously buttoned-down engineers have long been privately disdainful of BP's internal practices and safety record, making a cultural fit difficult.
An acquisition by Exxon could also make the combined company too big, attracting the attention of antitrust regulators around the world. And the British government might object to the sale of a formerly state-owned company — until the 1990s known as British Petroleum — to an American concern.
Whether Exxon makes a play or not, BP is adapting to a world where Shell's deal has upended the industry's expectations on mergers and acquisitions.
"All players are looking at opportunities," Eldar Saetre, the CEO of Norway's largest oil producer, Statoil ASA, said last week. "There could be more deals."
— With assistance from Javier Blas, Ruth David and Dinesh Nair in London.