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BP Spinoff Case Overstated

Argus Research's Weiss added that it's logical to make the case that BP's refining and marketing business is large enough to be viable and attractive as a stand-alone stock play, but the financial bang that BP could see in a spinoff might not be as exciting as investors hope. On a revenue basis, refining was four times exploration and production for BP in the first quarter, however, on an earnings basis, E&P was four times greater than refining. In the fourth quarter 2010, E&P earnings were eight times refining and marketing earnings.

"E&P is the profit driver, and if a unit represents a smaller portion of the market value, then the value accretion from a spinoff would be less," Weiss said.

The Argus Research analyst said a better spinoff case for BP can be made to break up the company geographically, such as an "Emerging BP" company. Yet even this would be one more form of financial engineering, Weiss said, because from a deepwater drilling standpoint West Africa, Brazil and the Gulf of Mexico are more alike in profile than different. Even so, an "Emerging BP" or "BP Americas" would deal more directly on the E&P side of the equation, where the value is in BP shares.

In the case of BP, the spinoff issue may be as much a function of the stock lagging peers as making strategic sense for BP. With the Macondo overhang still holding back BP, Wall Street can make the case that the quick payback is worth it, and investors who have watched BP shares get stuck in the mid-$40s will go along for the ride. The market has shown that it rewards companies for financial engineering, said Raymond James' Hudson.

"It's just financial engineering, but it's a reasonable topic to bring up," Weiss said. Between the failure of BP to close the deal with Rosneft to jointly explore the Arctic, the lack of clarity on when BP gets back to work in the Gulf of Mexico, and two specific refinery sales that BP has yet to close -- Carson City and Texas City -- there are few catalysts for BP shares short of financial engineering, and investors may be getting frustrated.

"People are upset because of Rosneft," Weiss said.

The U.S. government also announced last Friday that it would delay the release of the U.S. Coast Guard report on the BP oil spill, which was scheduled to be released this week. BP watchers had hoped the release of the report would be one more sign that the gross negligence argument against BP was weak, and that the report would spread the blame across multiple companies, giving BP shares a legal lift.
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