A consolidation wave has washed over the oil patch in recent years. ExxonMobil (XOM 1.11%) kicked things off with its $64.5 billion deal for Pioneer Natural Resources in late 2023. Chevron (CVX 1.02%) followed with a megadeal of its own, agreeing to buy Hess for $60 billion in a deal it hopes to close this summer. Several other oil companies have joined the merger wave by making smaller deals.

After a calm in recent months, a potentially massive deal could be brewing. Several oil companies have run the numbers on buying BP (BP 4.08%). Here's why it has become a takeover target and what big oil companies might buy the oil stock.

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Shifting strategy

BP has struggled in recent years. The British oil giant has undergone two significant strategy shifts. In 2020, the company pledged to cut capital spending on oil and gas projects, which would steadily reduce its production by 40%. It aimed to shift that spending toward rapidly growing its clean energy businesses.

However, a recovery in oil prices and years of underperformance led the oil giant to shift gears on its strategy again earlier this year. It's slashing spending on renewables from a plan to invest $5 billion annually to a $1.5 billion to $2 billion yearly level.

Meanwhile, it's boosting its oil and gas capital investment plan to $10 billion per year. As a result, BP will grow its renewable business much more slowly while increasing its overall oil and gas output to an average of 2.5 million barrels of oil equivalent (BOE) per day by 2030, up from less than 2.4 million BOE last year.

BP's abrupt strategy shifts have it searching for an identity. It stands in stark contrast to U.S. oil giants Exxon and Chevron, which have well-defined multiyear strategies for growing shareholder value. For example, Exxon plans to invest $140 billion in developing its advantaged assets (lower cost and higher margin) while stripping out billions of structural costs. This plan has the oil giant on track to add an incremental $20 billion in earnings and $30 billion in free cash flow by 2030.

Meanwhile, Chevron is also investing heavily in growing its advantaged assets, which will drive industry-leading free-cash-flow growth of as much as $10 billion by 2026. Both oil companies are also investing strategically to grow their lower-carbon energy platforms, focusing on investments that can earn attractive returns, like carbon capture and storage, biofuels, and hydrogen.

Running the numbers

BP's underperformance due to strategic missteps is making it a takeover target. The initial speculation centered around fellow British oil company Shell (SHEL 1.64%) as a potential interested party.

Shell initially downplayed its interest in a tie-up with BP. CEO Wael Sawan told the Financial Times that his company would prefer repurchasing its stock over buying BP. He also stated on the company's first-quarter earnings call that "We have to have our own house in order" and have "more work to do" before it would be in a position to launch an acquisition of the size and scale of BP.

However, Shell has reportedly looked into acquiring BP. It's not the only one. Exxon, Chevron, TotalEnergies, and Abu Dhabi's Adnoc Gas have all reportedly run the numbers on acquiring BP. In addition, oil trader Vitol has considered buying parts of BP.

While there's a lot of potential interest in buying BP, such a deal would be difficult. For starters, BP has a lot of debt ($77 billion), due partly to paying for the Deepwater Horizon disaster. As such, buying BP could negatively impact the acquiring company's balance sheet. That might not be something Exxon and Chevron want to do, as they prefer to maintain their fortress balance sheets because it gives them more flexibility to weather industry downturns. Regulatory scrutiny is another potential roadblock to a deal. Regulators in the U.K. might want to keep BP out of foreign control.

Still unappealing

There's growing speculation that a big oil rival might buy BP. However, while several companies have run the numbers, getting a deal closed won't be easy, even if the numbers work. Add the uncertainty of that catalyst to the company's shifting strategy, and it's an unappealing investment compared to Exxon and Chevron, which have well-defined strategies for growing shareholder value.