BP: An Energy Giant That’s Shriveling Fast

by Aaron Levitt | August 16, 2012 1:10 pm

The ghosts of 2010’s Deepwater Horizon oil spill continue to haunt BP (NYSE:BP[1]). The company’s latest earnings included an additional $847 million provision to pay for the disaster. So far, the total set aside for the worst oil spill in history has reached nearly $38 billion — or more than two years’ worth of profits at current energy prices.

While the legal drama continues to play out in court, the integrated energy giant has undergone a massive divestiture program, seen as a necessary step in paying for the cleanup and costly ligation.

As expected, first came sales of noncore oil and gas fields as well as non-hydrocarbon assets like BP’s wind farm division. However, the latest batch of asset sales — including the stake in its profitable Gulf of Mexico[2] holdings — should make investors quite nervous. As BP begins to “scrape the bottom of the barrel” and continues to sell now-prime assets, it risks losing its status as one of the world’s largest and diverse energy firms. That’s certainly cause for concern.

Overall, CEO Bob Dudley has pledged more than $38 billion worth of asset sales from BP’s portfolio in order to pay for 2010 disaster, which killed 11 workers and created a horrific oil spil. Since then, the giant has been fighting an uphill battle. The latest round of asset sales is certainly testament to that.

From Refineries to Reserves

Wrapping up a three-year probationary period stemming from a 2005 refinery explosion that killed 15 people, BP agreed on Aug. 13 to sell its Carson refinery in California[3] and its related assets to independent firm Tesoro (NYSE:TSO[4]) for $2.5 billion. The 266,000 barrel-a-day facility is complex and equipped with modern “cracking” capabilities. The kicker is just how little Tesoro paid, showing just how desperate BP is.

A little over half of the $2.5 billion price tag comes from selling Carson’s current inventory. For the remaining $1.2 or so billion, Tesoro gets 800 Arco branded gas stations across the West that it values at $125 million. It also gets assets including three marine terminals, four storage units and 114 miles of pipeline that it will sell to its Tesoro Logistics (NASDAQ:TLLP[5]) subsidiary for $1 billion.

After all is said and done, analysts estimate that Tesoro paid just $50 million for the actually refinery. That’s a mere $14 per barrel of oil it processes each day at the sophisticated plant, making this the cheapest refinery deal[6] in more than three years.

However, the asset sales didn’t stop there. BP also announced that Eagle Rock Energy Partners is paying $227.5 million in cash for its Sunray and Hemphill gas processing plants in Texas. The plants have a combined capacity of 220 million cubic feet of gas per day and a gathering system of about 2,500 miles of pipelines.

Similar to a real estate sale-leaseback transaction, Eagle Rock Partners will continue to  process BP’s natural gas production from the existing wells connected to the two plants for the next 20 years.

The refinery and gas processing plant sales are one thing, but BP’s additional announcement that came with these divestitures is even more truly troubling. It has prepared preliminary information[7] for prospective buyers of assets including the Horn Mountain, Holstein, Diana Hoover and Ram Powell fields — all located in the Gulf of Mexico. BP is seeking more than $7.9 billion from the sale of these fields.

This grouping of both deepwater and shallow fields holds proven reserves of about 120 million barrels of oil and produced about 58,000 barrels a day in the first quarter. Prospective buyers include Statoil (NYSE:STO[8]) and Exxon Mobil (NYSE:XOM[9]).

Here’s the problem: Even with the Deepwater Horizon spill, BP’s Gulf of Mexico operations are some of the most profitable in its entire energy portfolio. While it has called these assets “non-strategic,” the Gulf assets are cash cows for the beleaguered firm. Additionally, giving your major competitors access to some real quality assets for potentially dirt cheap prices doesn’t make any sense.

Where’s the Value?

At least in Conoco‘s (NYSE:COP[10]) efforts to slim down[11], it hasn’t begun giving away the store. With BP now starting to move some prime assets into sell column, it risks losing its place among the worlds largest and best energy firms. We’ve often written about how the energy majors need to continually add new sources of supply to their resource bases — not sell them off.

Add to this BP’s recent issues in Russia with its TNK-BP venture[12], along with the continued Deepwater Horizon legal overhang, and it’s easy to see why many institutional investors are beginning to bail. Billionaire investor T. Boone Pickens sold his entire stake in BP — 452,111 shares — according to his latest 13F filing with the SEC.

As I’ve said before, with so many issues facing BP[13], I’m don’t see why anyone would want to own its shares. BP could still have some value, but with the company now selling prime assets at bargain prices, it’s getting harder to find.

As of this writing, Aaron Levitt doesn’t hold any securities mentioned here.

Endnotes:
  1. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  2. Gulf of Mexico: http://investorplace.com/2012/05/energy-independence-the-gulfs-growing-role/
  3. Carson refinery in California: http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/tesoro-to-buy-bp-refinery-arco-retail-for-25-billion/article4478406/?cmpid=rss
  4. TSO: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSO
  5. TLLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=TLLP
  6. cheapest refinery deal: http://investorplace.com/2012/08/the-effects-of-surging-gasoline-exports/
  7. prepared preliminary information: http://www.bloomberg.com/news/2012-08-14/bp-said-to-seek-7-9-billion-selling-gulf-of-mexico-oilfields.html
  8. STO: http://studio-5.financialcontent.com/investplace/quote?Symbol=STO
  9. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  10. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  11. efforts to slim down: http://investorplace.com/2012/05/can-conocos-divide-and-conquer-plan-win/
  12. TNK-BP venture: http://investorplace.com/2012/07/bp-just-cant-win-in-russia/
  13. so many issues facing BP: http://investorplace.com/2012/03/is-bp-back-only-partly/

Source URL: http://investorplace.com/2012/08/bp-an-energy-giant-thats-shriveling-fast/
Short URL: http://invstplc.com/1nyzCJt