The collapse of BP's planned sale of a $7 billion (4 billion pounds) stake in an Argentinean unit is Chief Executive Bob Dudley's second failed multi-billion dollar deal this year and has renewed investor concerns about his claimed turnaround of the group.
Dudley hinted last month that the oil giant could lift its dividend next February, saying the group had reached a turning point after its Gulf of Mexico oil spill. But the failed deal now puts a question mark over those plans.
As with all things to do with BP the issue is as much to do with risk and this deal failure does highlight execution issues again, analysts at UBS said in a research note.
BP shares traded up 0.5 percent at 1524 GMT on Monday, lagging a 0.3 percent drop in the STOXX Europe 600 Oil and Gas index, after the planned sale of its 60 percent stake in Pan American Energy was abandoned.
The decision of buyer Bridas, half-owned by China's CNOOC, to terminate talks, will hit BP's cashflow and make a payout hike harder to deliver.
As the second major deal to fall apart for BP this year -- in May a planned $16 billion share swap and multi-billion dollar Arctic exploration deal with Rosneft collapsed -- analysts said the failure showed the risks around BP's strategy of rapid dealmaking.
BP launched a $30 billion disposal programme last year to help pay the $40 billion bill for the spill. The London-based oil giant said this would force it to shrink but that an expansion of exploration and dealmaking would thereafter allow it to grow more quickly.
Rating agency Fitch said that the failure to seal the Pan American deal did not significantly damage BP's financial health because high oil prices have helped it produce strong cash flows.
However, analysts said the fact BP has had to cut the increase in its divestiture target it announced with fanfare on October 25, as it unveiled sluggish results for the third quarter, would hit the oil major's credibility.
It is not normal practise to issue a strategic target and then issue a lower one two weeks later, Peter Hutton, at RBC Capital Markets said.
Bridas sent a letter to BP last week terminating the talks, both sides said.
Analysts and bankers said the deal likely fell apart because BP was unwilling to renegotiate downward the terms after a recent Argentine legal change, which made the asset less attractive.
The measure, aimed at tackling capital flight, will force foreign oil and mining companies to cash in all their export revenue on the local foreign-exchange market. BP said it did not consider a price reduction after this change.
The parties involved did not specify reasons and blamed each other for the collapse.
A BP spokesman told Reuters that Bridas had chosen to terminate the transaction for reasons known only to them. Dudley said two weeks ago he expected the sale to close in 2012.
Bridas cited legal issues and the way BP handled the transaction without specifying either.
A CNOOC official said the collapse was not, as some reports suggested, the result of Argentine government opposition but the result of a disagreement over commercial terms.
The negotiation regards many commercial terms. We have disagreement, the official said.
The ending of the deal was possible because it was conditional on Argentine anti-trust and Chinese regulatory approvals. When these were not received by a November 1 deadline, either side were entitled to withdraw.
Since CNOOC is state-controlled and has a mandate to buy energy assets overseas, analysts said the Chinese regulatory approval should not have been a problem.
Bankers say that Beijing selects which state-controlled oil company bids for overseas assets, to avoid them competing against each other, and this is also seen as reducing the risk of securing regulatory approval.
A source at the Argentine antitrust commission told Reuters in September that it had not placed any impediment to the planned deal, which announced in November 2010.
BP said responsibility for securing regulatory approval lay with Bridas, which already owns 40 percent of Pan American.
By contrast, a deal in which China's Sinopec agreed to buy Occidental's Argentina assets for $2.5 billion was announced last December and closed in the first quarter of the year.
CHINESE REPUTATION HIT
Dudley has admitted to being under pressure from investors to turn the company around, after lacklustre performance since the blown-out Macondo well was sealed last September.
The company's shares have not risen in the past year.
Dudley has said the weak operational results are the result of a programme of investment to improve safety at facilities but some investors have questioned his judgement.
China's reputation as a reliable energy asset buyer may also be at risk. This was the second failed multi-billion dollar deal involving a Chinese state-controlled oil company in the past 6 months.
In June, PetroChina and Canada's Encana called off an announced $5.6 billion deal whereby the Chinese group would buy a half share of some of Encana's shale gas assets.
Chinese oil companies have long enjoyed a stronger reputation as buyers than their Indian and Korean rivals.
ONGC's failed legal attempt to escape being held to a completion date on its takeover of UK-based Imperial energy in 2008, just as oil prices collapsed, has weighed heavily on India's reputation in the asset market.
Korea National Oil Corp has also had to battle perceptions of being an indecisive buyer, although its successful closing of a hostile takeover of Britain's Dana Petroleum has helped.
If owners of oil fields felt Chinese companies had a tendency to rethink deals after terms were agreed, it could make it harder for the companies to fulfill their mandates of securing new fields to power China's booming economy.
However, Simon Ashby-Rudd, Global Head of Oil & Gas at Standard Bank, said China's status as the fastest growing consumer of oil and gas ensured it would retain a prime place at the negotiating table.
(Additional reporting by Sarah Young in London and Wan Xu in Beijing; Editing by Chris Wickham, Hans-Juergen Peters and Jon Loades-Carter)