Should BP split to benefit its investors?

25th July 2011

The move would split what are known as its upstream businesses i.e. exploration and production from its downstream refining business and would copy a similar move by rival albeit smaller firm ConocoPhillips.

As Bloomberg reports here Conoco's decision to split its refinery arm from its exploration and production business led analysts at banks including UBS, Bank of America and JPMorgan Cazenove to recommend BP look at a similar move.

Bloomberg also quotes JPMorgan analyst Fred Lucas as saying that BP's 40 percent discount to the total value of its assets compares with an industry average of 27 percent.

If BP decides against further asset sales or a split, fund managers are demanding that it articulate a strong alternative strategy.

Here Citywire reports on suggestions that BP directors have been canvassing shareholders on a possible split.

However some commentators believe that those demanding a split may be jumping the gun. On the Wall Street Journal, Andrew Peaple, writing his Heard of the Street column says: "The energy-trading business relies on stocks supplied by Exploration & Production. E&P also needs a refining capability to fully exploit its unconventional assets, such as its oil sands in Canada. Besides, a stand-alone E&P company worth about $100 billion wouldn't resolve BP's central dilemma: where to find growth opportunities large enough to add significant value.

"Most importantly, BP is unlikely to split while its final oil-spill costs are unknown. A larger group can better absorb those costs than a stand-alone E&P company. Waiting for clarity on Macondo at least gives BP time to see whether ConocoPhillips's split leaves investor's hearts in misery."

This pressure comes despite the fact, that the UK's oil and gas firms are expected to post huge profits with Royal Dutch Shell leading the way. BP itself is expected to return to significant profit while BG should also do well too when it reveals its results this Thursday.

The Telegraph reports that the firms could make a combined £9.2bn for the last quarter and details analysts' expectations here.

However Deutsche Bank oil analysts see supply issues for later in the year.

"A key facet of a sector bull thesis is that, after a number of years of disappointment, 2012 to 2013 will see the sector return to growth. Unfortunately, second quarter 2011 results are unlikely to build confidence in this theme.

"A combination of divestments, maintenance, extreme seasonality [low European gas demand], limited production from Libya and a series of stock-specific issues, drive our expectation for a 7pc year-on-year production decline."

Some of the commenters have seized on the difficulties of finding more oil. They point to this assessment of ExxonMobile for example on blog site Viable Opposition.

Here on the R Squared energy blog Robert Rapier considers BP's recently released 2011 Statistical Review of World Energy and what it may mean for supply and demand. It sees an increasingly significant role for China which may not chime with the West's energy needs.

More from Mindful Money:

BP is a Buy; if you're tough enough

BP: The true cost of the US/UK blame game

How going green could have spared BP investors' pain

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