A Compelling Alternative to BP and Its Fire Sales
Perhaps you can help me. I'm doing my dead-level best to find a company that's been more self-destructive during the past decade than BP (NYS: BP) . It seems, however, that the British oil giant leads the world in the number of shots taken at its own feet. To wit:
2005 -- An explosion at BP's Texas City, Texas, refinery kills 15 and wounds dozens.
2007 -- The company's CEO, Lord John Browne steps down abruptly for personal reasons.
2008 -- Bob Dudley, then CEO of the company's TNK-BP partnership in Russia, is forced to leave the country amid skirmishes with Russian authorities and the company's Russian oligarch partners.
2010 -- An explosion aboard the BP-leased Transocean (NYS: RIG) Deepwater Horizon rig kills 11 and sets off a 4.9 million-barrel oil spill.
2010 -- BP is fined $50 billion, following the disclosure of additional OSHA violations at the Texas City refinery.
2010 -- Lord Browne's replacement, Tony Hayward, resigns over intemperate remarks made during the Gulf of Mexico spill. He's replaced by none other than Bob Dudley.
2011 -- Dudley -- he of the battling-with-Russian-partners fame -- agrees to a partnership with Russian oil giant Rosneft, only to have the deal scuttled by a lawsuit by his company's still-obstreperous TNK-BP partners.
2012 -- BP ponies up another $13 million to OSHA for lingering Texas City safety violations. (Source 8)
2012 -- Rosneft and BP agree to a sale of the latter's interest in TNK-BP to the Russian company.
You're probably wondering why I'm including the two newly announced sales -- the refineries and the TNK-BP pact -- as problem areas for BP. After all, won't those transactions extricate the company from two of its most troublesome ventures? The answer is "yes," but also "no." Let's take a look.
A Texas pipe dream?
Regarding the refinery sales, and especially the agreement to unload the Texas City facility, there are a couple of positives to be noted. First, as indicated, the company can walk away from a unit where it's been figuratively "snakebitten." After all, it's absurd to note that it's still paying safety violation fines on a refinery that exploded with resulting loss of lives fully seven years ago. And as ConocoPhillips (NYS: COP) and other formerly integrated companies have indicated, there's clearly an emerging school of thought that upstream operations don't always benefit from the existence of downstream siblings.
My difficulty with the Texas City refinery transaction lies with its classification as a sale, rather than a donation. Half of the $2.5 billion price involves the value of inventory already at the unit. Of the remainder -- $1.3 billion -- BP will be given only a paltry $598 million at the closing. The remainder will be paid by Marathon Petroleum only in the event that specified profit targets are met at the facility. Even at that, the likely valuation, therefore, is the equivalent of one-year's earnings before interest, taxes, interest, depreciation, and amortization from the troublesome refinery. Sale or donation?
Putin's perverse pals
Turning to the pending TNK-BP sale, we can't call that one a gift. After all, BP paid $8 billion for its half-share of the venture in 2003. For the sale -- its Russian partners are also unloading their stake to Rosneft -- it'll receive $17.1 billion in upfront cash. That's on top of the $19 billion in dividends it's collected from the partnership through the years.
But it'll then have to ante up $4.8 billion at closing for shares in Rosneft. When all is said and done, it'll have received $12.3 billion in cash and hold a 20% interest in the Russian company. You know about the Russian government's tendency to use sharp elbows on Western companies once they've extracted a full measure from them.
Beyond that, as an erstwhile Royal Bank of Canada analyst, I'll pass along a quote from one of the firm's current energy observers, as stated in Monday's Wall Street Journal. Peter Hutton observed quite simply, "It's all very well getting a stake in Rosneft, but if its illiquid and BP can realize it, then it becomes a lower-quality asset." And as my Foolish colleague Maynard Paton pointed out on Monday, the loss of dividends from TNK-BP could open BPS's dividend staying power to question.
If you think that BP has crawled out from the rubble resulting from its myriad difficulties, and you subsequently have an itch to buy the company's stock, I have a better way for you to scratch it: Buy U.S.-basedChevron (NYS: CVX) . The California company's market capitalization is 60% higher, and its forward P/E is approximately 8.7 times, while BP's is about 7.6. And while BP's current forward annual dividend rate -- assuming no reduction -- is 4.50%, Chevron's is 3.20%. I need bigger differentials in both areas to swallow the question marks that accompany BP shares.
While you ruminate about my conclusions, I suggest that you follow both companies carefully through the simple act of adding them to your own version of My Watchlist.
The article A Compelling Alternative to BP and Its Fire Sales originally appeared on Fool.com.David Lee Smith owns shares of BP. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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