BP Looking Strong on a Wave of New Deals
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As BP’s (NYSE: BP) liabilities in the Gulf Coast from the Deepwater Horizon disaster are slowly but surely settled, BP has a more positive outlook. Fitch Ratings raised BP’s Long-term Issuer Default Rating to positive from stable now that it appears BP “should be able to cover its remaining legal costs without impairing its financial profile.” The company is definitely looking ahead for new deals now that the path is clearer, including a deal that could see its exit from the TNK-BP joint venture impairing its Russian opportunities.
TNK-BP JV Partners Looking for an Out
BP is looking for a modification in its jointly controlled Russian joint venture TNK-BP, which is delivering disappointing results and potentially limiting BP’s moves in Eurasia due to restrictive clauses in the original joint venture agreement. It appears that the 50/50 interest and control split between the partners is proving unworkable, and BP has 90 days to reach a final deal with its partner Alfa Access Renova (AAR).
AAR is indicating that it is only willing to purchase half of BP’s stake for about $10 billion, but would prefer to sell its half of TNK-BP to BP in return for cash and BP stock. BP is not showing any interest in purchasing a deeper stake, stating through a spokesman that the firm is “looking at the process of selling, not buying.” Though it says it received other offers, BP is prohibited from confirming any deals with outside parties until after negotiations with AAR are complete.
The main problem is Russia’s tightly controlled economy and political structure, which deter all but the most determined buyers, and even then the most viable buyer almost must be based in Russia, according to the Wall Street Journal. Despite clashes between AAR and Russian giant Rosneft, Rosneft may still make a bid for BP’s stake in the TNK-BP venture. Rosneft is considering hiring Krzysztof Zielicki, former BP Vice President and head of mergers and acquisitions at TNK-BP prior to his recent departure from the firm, which would add weight to any bid Rosneft makes for BP’s stake. Rosneft already counts several former high-level BP executives on its payroll.
BP Adds R&D Capex to Biofuels
Despite its position as a world leader in traditional energy, BP believes that biofuels could account for 30% of global transportation liquids by 2030, which would reduce demand for its core products. Between this prediction and the U.S. government’s mandate to blend cellulosic ethanol into gasoline supplies, BP is expanding into emerging fuel development, particularly cellulosic biofuels, fuels made primarily from plant materials.
A hurdle here is the fact that no cellulosic biofuel can yet be produced in commercial quantities, which has the American Petroleum Institute and the American Fuel & Petrochemical Manufacturers association countering the mandate in court. BP is pursuing its development projects even though it is a member of both trade groups, and it is unclear if BP will drop its interest in the technology if the suit clears the energy industry from the mandate.
Settlements Quickly Reducing Drags on BP
President Obama recently signed the Restore Act into law, which clarifies that ultimately 80% of the fines assessed to BP over the spill will be split equally between five Gulf Coast states: Louisiana, Texas, Mississippi, Alabama and Florida. The law also limits the fines BP faces to between $1,000 and $4,300 per barrel, which would mean total fines between $5 and $20 billion, well within BP’s expectations. The next step is for BP and interested parties to arrive at a settlement under the auspices of the newly created Gulf Coast Ecosystem Restoration Council.
BP also recently agreed to a $13 million settlement related to safety violations at its Texas City oil refinery that allegedly contributed to a 2005 explosion that killed 15 workers. The $13 million in fines is in addition to the $50 million BP paid in 2010 for other violations at the facility. So far, BP paid $3.5 billion to settle safety claims and lawsuits and make needed improvements on the refinery. BP is marketing the refinery, and it is hoped that settling these outstanding claims will make the asset more attractive to buyers.
New Deals on the Horizon
The Azerbaijani government, through its state owned oil company SOCAR, wants BP to participate in its potential Trans-Anatolian gas pipeline. Al Cook, Vice President of Shah Deniz Development for BP, confirmed that BP was approached with a formal invitation to participate and indicated that BP “will support SOCAR with our experience in operating pipelines and therefore we would like to have enough material stake to support and contribute to the project.” The pipeline would move natural gas from Turkey to Europe, primarily from the massive Shah Deniz gas field in the South Caspian Sea. The field is already producing 9 bcf annually, and a second stage will add 16 bcf of production.
In the U.S., BP is continuing to take cues from independents, with its latest imitative move a plan to institute crude by rail between Montana and North Dakota and its Cherry Point refinery. Confirmation of the project could come within the next sixty days according to Mike Abendhoff, Director, Government and Public Affairs at BP America, a BP subsidiary. Comparatively tiny EOG Resources (NYSE: EOG) inaugurated a crude by rail service with the St. James crude-by-rail facility earlier this year. EOG Resources' success may be what is prompting BP to explore the move.
BP is moving slightly higher on this raft of good news, currently trading around $42 per share with a price to book of 1.1 and a forward price to earnings of 15.0. This is a premium to what is commanded by its competitor Total (NYSE: TOT), which operates in many of the same areas. Total is currently trading at a price to book of 1.1, with a lower forward price to earnings of 5.5. ConocoPhillips (NYSE: COP) is also trading close to its book value, again at 1.1 with a forward price to earnings of 7.6.
I think that BP’s deeper diversification is a strong point for the company, as is the fact that it is emerging from the Macando blowout a stronger company overall. BP’s chances of successfully navigating the changing oil and gas landscape are good, which makes BP a reasonable buy.
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