On the Right Path With Disinvestments

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The US Oil & Gas industry is faced with huge opportunities from constantly rising energy demand. In order to exploit these opportunities all the companies in this sector are focusing on expanding their global reach via acquisitions. But, conversely, the UK oil giant BP Plc., has its eye on disinvestments to boost up the returns for its shareholders. The company has been trying to dispose-off the non-strategic assets from its portfolio to cover up its costs incurred by the Macondo oil spill. Under the company's divestiture program started in 2010, the company is expecting to sell some of its assets worth $38 billion by 2013. This is an important move by the company to offset its dropping cash reserves from the fines and settlement dues of its major oil spill accidents. On the other hand, its two competitors, Chevron and ExxonMobil, are continuously looking out for more and more acquisitions to expand their domestic as well as international production output.

Let’s look at the competitive positions of the main players in this industry- 

<table> <tbody> <tr> <td> <p> <strong>Company</strong></p> </td> <td> <p><strong>P/E Ratio</strong></p> </td> <td> <p><strong>Forward Annual Dividend Yield </strong></p> </td> </tr> <tr> <td> <p><strong>BP plc</strong> <span class="ticker" data-id="202988">(NYSE: <a href="http://caps.fool.com/Ticker/BP.aspx">BP</a>)</span></p> </td> <td> <p>7.53</p> </td> <td> <p>5.10%</p> </td> </tr> <tr> <td> <p><strong>Chevron Corporation</strong> <span class="ticker" data-id="203255">(NYSE: <a href="http://caps.fool.com/Ticker/CVX.aspx">CVX</a>)</span></p> </td> <td> <p>8.61</p> </td> <td> <p>3.40%</p> </td> </tr> <tr> <td> <p><strong>ExxonMobil Corporation</strong> <span class="ticker" data-id="206209">(NYSE: <a href="http://caps.fool.com/Ticker/XOM.aspx">XOM</a>)</span></p> </td> <td> <p>9.37</p> </td> <td> <p>2.60%</p> </td> </tr> </tbody> </table>


Chevron Corporation (which, I have covered in detail here) is one of the biggest Oil & Gas companies in the world in terms of revenue. However, its 3Q12 earnings were down ~17% to ~$5.1 billion in its upstream business. Its third quarter performance was hurt by a fire accident at its Richmond refinery in California. But, emerging out of the setback, the company is now back on track with its expansion strategy. It recently acquired assets of Chesapeake Energy in the Permian Basin to enhance its North America operations. Along with this, the company is increasing its footprint in Lithuania, Poland and Bulgaria in Europe. Talking about its initiative in emerging markets, Chevron started an expansion program in Indonesia by putting in ~$500 million on its project in Sumatra.

In sync with the trend of Oil companies embarking on international market expansion, another giant ExxonMobil announced the finalizing of its agreement to buy Celtic Exploration Ltd for ~$2.6 billion. The company is aiming to focus heavily on natural gas production with this acquisition. With natural gas demand estimated to rise by ~60% till 2040, and with the proposed Carbon Tax policy to be implemented soon in the US, the Natural Gas industry could see upside. As a result, this acquisition will be a great asset for Exxon to boost its revenue. Coming over to the future pipeline, the company has 21 new projects scheduled to be started by 2014, which would ultimately increase its production output.

Rounding back to BP, I see an excellent entry point for investors here even though its stock price has seen a lot of volatility in the last six months with a return of just ~9%.  This stock will gain momentum following the closure of its various disinvestment activities. Let's have a look at them in detail 

BP's Exit from TNK-BP

BP’s recent announcement about the sale of its 50% share in its joint venture (TNK-BP) to the Russian oil & gas company Rosneft is its biggest deal since 2010. As part of this deal, BP will receive ~$12.3 billion in cash, plus a 12.84% stake in Rosneft. Further, from the cash proceeds received from this deal, BP will be able to buy an additional 5.66% stake in Rosneft thus raising its total stake to ~19% (currently only 1.25%) in the Russian company. The transaction will be completed in the first half of 2013 subject to various approvals.

Let’s examine the various positive outcomes from this deal -

  • With this exit from TNK-BP, BP has severed its relationship with AAR which was just a group of investors and has now joined hands with a far more powerful partner Rosneft. Looking at several shareholders’ disputes with AAR, this step was a wise move from BP which came as tremendous relief to its shareholders.
  • With its investment in Rosneft, BP is looking at some good opportunities in Russia which has the largest gas resources in the world. Rosneft has an excellent growth profile with its presence in the Arctic and the Black seas and once the deal is completed, BP will also get an entry into Rosneft's oil reserves.
  • Also, the company is planning to use a part of its cash proceeds from the deal for a share repurchase which would offset the recent dilution of its EPS. I expect an increase of ~4 billion in share buybacks in 2013 to compensate the ~3-4% of EPS dilution.

Other Divestitures expected to close in 2013 -

  • BP also sold its Texas city refinery to Marathon Petroleum Corp for ~$2.5 billion. The enormous size and the troubled history of the refinery made it quite difficult for BP to find suitable buyers. And, this deal also puts an end to a quarrelsome episode for the company.
  • The company will generate another ~$210 million be selling its 40% stake in Crossfield Gas storage to TransCanada Corporation.

To conclude, I feel that the company is on track with its ongoing divestiture program which was announced in 2010. The company's strategy of selling off its non-core assets will turn out to be favorable in the long run. Moreover, BP plc has the lowest P/E ratio of 7.53 among its competitors which makes it an undervalued stock at the moment. And, I expect BP to grow at a speedy rate as compared to its peers. Its annual dividend yield which is the highest among its peers also makes it a favorable stock. Therefore, I would rate this stock as a buy. 

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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