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BP Spinoff Case Overstated

NEW YORK (TheStreet) -- A spinoff by BP (BP) of its refining and marketing business is the type of financial engineering trick that will assuage frustrated shareholders and fatten the coffers of investment bankers, but makes less sense from a strategic standpoint for the oil company.

JPMorgan may have added to the support for a BP refinery spinoff on Monday, pegging the spinoff value to BP shares at $100 billion, but the investment bank's not the first to raise the subject since ConocoPhillips (COP) announced its plans to spin off its refining operations. JPMorgan chose a good time, too, to push the BP spinoff plan. BP is set to kick off big oil earnings season on Tuesday morning, and the ConocoPhillips spinoff plans were just revealed this month, meaning that second-quarter conference calls will be Wall Street's first chance to press "Big Oil" companies on spinoff plans. That's not a chance Wall Street will pass up.

"Everyone will get asked about it. ConocoPhillips brought it into the forefront again, and anytime somebody does a transaction the Street wants everyone to do it to get their money," said Argus Research analyst Phil Weiss.

Weiss is not alone in hesitating to endorse a spinoff that amounts to little more than financial engineering. Raymond James makes the case that a comparison between BP and ConocoPhillips is misplaced when it comes to valuing the refining operations. As a ratio of proven reserves to refining capacity, BP has the second-largest mismatch in the industry, behind Petrobras (PBR). BP's ratio of proven reserves to refining capacity at the end of 2010 was 5.7, compared to Petrobras at 6.4. By contrast, ConocoPhillips had a much higher percentage of refining relative to proven reserves among oil majors, at 3.4. Further, BP's refining operations seem even less significant when compared to the refining of a company that has completed a similar spinoff like Marathon Oil (MRO). At Marathon, the ratio of proven reserves to refining capacity was only 1.4, according to Raymond James.

Stacy Hudson, analyst at Raymond James, doesn't see a BP refinery operations spinoff happening for this reason.

"What we've boiled it down to is a look at the companies that have divested refining, and in these cases refining was a much bigger part of the business," Hudson said. In fact, Raymond James data implies that Exxon Mobil (XOM ) and Royal Dutch Shell (RDS.A) should consider a spinoff before BP, with ratios of proven reserves to refining capacity at 4. Chevron's (CVX) ratio is 4.9.

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