by Aaron Levitt | October 9, 2012 11:54 am
Still reeling from the 2010 Deepwater Horizon drilling disaster in the Gulf of Mexico, BP (NYSE:BP) has undergone a massive $38 billion divestiture program. Among the asset it has shed are refineries, shale land in Wyoming and offshore fields in the Gulf of Mexico. All in all, BP has sold roughly $35 billion in total assets so far.
However, just after BP finished selling its Carson refinery in California to Tesoro (NYSE:TSO) for a relative song, its latest refinery sale could be another step backwards for the beaten-down energy giant.
Despite being one of the largest and most complex refineries in the U.S., BP’s Texas City operation — which it sold to Marathon (NYSE:MPC) on Oct. 8 — fetched less than a quarter of the $2.85 billion that London-based BP hoped to receive. With roughly $3 billion still to raise to cover the 2010 spill expenses, that lower price tag could mean yet more asset sales. And that could mean a longer bumpy ride for BP investors.
Like Tesoro before it, Marathon seems to be getting the key refinery for a bargain. Overall, the independent refiner, which is a Marathon Oil (NYSE:MRO) spin-off, will pay just $598 million for the facility. This includes three interstate natural gas pipelines, four gathering terminals, retail marketing contracts for approximately 1,200 branded gas stations and a 1,040 megawatt cogeneration facility.
Exactly the kind of stable assets that can easily be put into a master limited partnership subsidiary.
Marathon gets all of these goodies for far less than the $2.85 billion BP had targeted for its Texas City assets. Marathon will pay an extra $1.2 billion for inventories of oil and other products and may also pay a $700 million “earn-out” provision over the next six years if certain conditions are met at the 451,000 barrel-a-day plant.
Marathon will fund the deal with cash on hand, which is anticipated to close early in 2013. The purchase will make Marathon the fourth-largest U.S. refiner and is expected to boost earnings in the first year of operation.
For BP, the deal isn’t as sweet.
In order to focus more on Northern U.S. refineries with better access to cheap Canadian crude oil, BP could be selling its key refinery at the just wrong time. Aside from producing gasoline, Texas City is also a major refiner of natural gas liquids (NGLs). As the shale boom has played out, chemicals made from these NGLs have been resilient. Likewise, U.S. refiners are also benefiting from historically low natural gas prices. Those low prices and input costs are creating some of the best margins for U.S. refiners in decades.
Not to mention, the Texas City plant is well-placed to export fuel as U.S. consumption continues to decline.
Then there’s the actual low-ball price Marathon is paying. Given the size and complexity of the Texas City facility, BP in February 2011 expected to sell it for more than the 10-year average of $6,000 a barrel of refining capacity. Turns out, the refinery’s complexity made a finding a buyer difficult.
According to data compiled by Bloomberg, on a per-barrel basis, the $598 million price tag for Texas City is less than half the average price at which refineries have sold since 2009, and it represents one of the lowest valuations in two decades. BP’s Carson, Calif., refinery assets sold for just $1.18 billion, or about $4,417 a barrel of processing capacity.
Selling Texas City was further exacerbated by its problematic history. In 2005, the refinery suffered a horrific disaster: An explosion killed 15 workers and injured nearly 200 others. That resulted in BP paying out more than $2 billion to settle lawsuits and fines stemming from the explosion. It also has spent more than $1 billion on safety and infrastructure improvements and another $500 million to make good under a 2010 agreement with OSHA. Those issues drove the sale price down further.
That’s the rub for BP. Since it came up short in the two refinery sales, it will have to go farther down its list of assets to sell in order to reach its $38 billion goal. Given that it has already begun to move prime fields and facilities into the sell column, that could prove increasingly difficult.
All things considered, BP risks losing its status as one of the world’s energy giants as it sells itself off to pay for its legal drama. As we’ve said countless times before: Energy majors need to continually add new sources of supply — not sell them off.
The time to reevaluate BP’s prospects as an investment won’t be until it’s done paying back its share of spill damages and stops selling assets. I’m still not sure I’d want to own shares given that we don’t know what it will sell next — and especially because plenty of other superstar energy companies are ready to move into the major’s spot.
For me, BP is still a case of “just walk away.”
As of this writing, Aaron Levitt didn’t hold any securities mentioned here.
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