BP's Global Assets: To Sell or Not to Sell?

NEW YORK ( TheStreet) -- It's suddenly become all or nothing for BP ( BP) in the oil spill crisis. BP bankruptcy fears led to Wednesday's sudden plunge in BP shares to a 14-year low, but bankruptcy may not be a more likely outcome than individual asset sales by BP to calm the financial panic.

When market prudence gave way to BP panic on Wednesday (followed this morining, by a 10% spike in the pre-market), some analysts seemed frustrated, if not downright miffed, that BP was trading below $30, arguing that the panic button triggered by the oil spill had superseded investment logic.

It's hard to say. In BP's mismanagement of the oil spill, one can make the case that prudence and panic have become interchangeable terms.

The BP panic leads to some natural M&A questions for BP management: If fear of an impending BP bankruptcy are hyperbole, and the federal government isn't about to place the oil giant in receivership, does the panic mean BP can't avoid a takeover by one of its global oil peers? Or will the prudent approach for BP be to sell off some select individual assets?

When BP CEO Tony Hayward reminded investors on last Friday's conference call that BP has a great global portfolio of assets, his intention was not to make a subtle sales pitch to energy-sector peers, but rather, to remind anxious investors that the BP business extends well beyond the Gulf of Mexico.

Looking under the hood of the BP global portfolio, though, it is striking just how important the Gulf of Mexico is to the oil giant's strategic growth.

Ironically, BP did us all a favor in March, just a month before the oil spill crisis ensued, when it pitched an investor presentation showing what it considers to be its assets strong suits.

With a deepwater disaster now dominating BP's business and the outlook for the company's existence, the slide from the March investor presentation reproduced above is one that BP might prefer to have back now.

In the least, it helps to place into focus the fact that BP has a ton of deepwater assets, among other offshore and onshore oil and gas reserves and exploration projects, that will be part of the M&A discussion.

BP CEO Tony Hayward might not last long enough to see the eventual fate of BP. If rumors of Hayward's death as CEO of the underwater oil company are not greatly exaggerated, another slide from the March BP investor presentation highlights some pretty big risk-management failings.

BP CEO Hayward recently conceded that BP "did not have the tools you would want in your tool-kit" to deal with an oil spill of this magnitude. Yet BP has been pushing its deepwater lead over oil and gas peers. Additionally, the slide above highlights the relative size of BP's ambitions in the Gulf of Mexico. One would think that a prudent corporate manager, as a matter of corporate risk management, would have made sure that this toolkit was available to protect its big deepwater strategy. This BP failing, more than any other misstep might be the best reason for investors to call for the head of Hayward.

In the next five years, BP has plans to bring on stream 42 projects, adding an additional 1 million barrels a day to its production. Eleven of these projects are in the Gulf of Mexico.

BP also made what it refers to as a "giant oil discovery" 35,000 feet below the Gulf of Mexico, the Tiber project.

BP is by far the biggest operator in the Gulf of Mexico, producing 400,000 barrels of oil equivalent per day. It is the largest leaseholder in the region, with 550 leases.

In the March BP investor presentation, Andy Inglis, chief of exploration and production, was sanguine about the prospects of the region. "We see the potential for production from this province to continue to grow through this decade."

In a report released on Thursday, the International Energy Agency said the BP oil spill could be a "game changer" for the energy sector, restricting future deep-water oil business, and limiting global oil supply.
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BP has invested more than $14 billion in the Gulf of Mexico since 1994, according to company data.

In one of the many Gulf of Mexico BP ironies, BP also spent $7 billion last year to purchase the deepwater assets of Devon Energy ( DVN), including a portfolio of Gulf of Mexico assets. Devon sold out of the deepwater businesss because it didn't have the strength of balance sheet for the size of these ambitions, analysts say. Yet now BP is not only saddled with Gulf of Mexico assets that are exposed to unquantifiable regulatory risk, but the expectation of deepwater operational costs around the globe going higher by an unquantifiable amount as a result of its own oil spill, and at a time when the BP liability in the oil spill is also unquantifiable.

"With a big position in the Gulf of Mexico it wouldn't shock me if BP wanted to move something there," said Argus Research analyst Phil Weiss. However, Weiss noted that valuations are probably lower now, even if companies are comfortable with a timeline for an end to the moratorium on deepwater drilling, because drilling costs will go up.

In testimony on Capitol Hill on Wednesday, Interior Secretary Ken Salazar did not ease fears of a longer-term ban on deepwater drilling, refusing to say that the ban would be limited to its current timeline of six months under persistent questioning.

During the recent BP investor conference call, BP CEO Hayward downplayed the extent to which BP's strategy is predicated on the Gulf of Mexico, saying there wouldn't be a big impact on Gulf production until the back half of the current decade, in the event that assets are frozen or there are too many restrictions to drill.

One of the questions for BP now, though, is if it will be the oil company to eventually benefit from this Gulf of Mexico potential?

A case can be made that if BP is looking to sell individual assets, the Gulf of Mexico would be a good place for the oil company to focus its efforts based on the theory of killing two birds (forgive the unfortunate metaphor in this case) with one stone. BP has a big portfolio from which to choose in the Gulf, and it may be in an unpalatable political position for some time to come, to say the least, in terms of executing on a major deepwater strategy in U.S. waters.

Thunder Horse, operated by BP, is the largest single producing field in the Gulf of Mexico.

In September 2009, BP made its "giant" discovery in Tiber, located in the Gulf's lower tertiary. It was the deepest oil and gas discovery well ever drilled. In a twist of fate, the now destroyed Transocean ( RIG) Deepwater Horizon rig helped drill the Tiber well 35,000 feet below the surface of the Gulf of Mexico. The Tiber is estimated to contain 3 billion barrels of oil. BP had been the highest bidder for two blocks in the region just a month before the discovery.

The Tiber discovery reinforced BP's focus on the Gulf of Mexico and also attracted the attention of other oil majors who had diverted their investments to other regions.

It may again attract the interest of competing oil companies as BP looks for a way to save itself.

However, there are some tried and true principles in oil sector M&A that would not dictate a sale of a project like Thunder Horse, or a discovery like Tiber.

Energy sector analysts say that one of the guiding principles of asset sales by the oil giants is to unload assets that have reached a late state of production maturity. The economic equation for independent oil and gas companies makes for a stronger case of operating projects that are nearing the end of their life-span.

For an Apache Energy ( APA) or Occidental Petroleum ( OXY), operating oil projects at the level of 50,000 to 100,000 barrels a day makes sense, relative to an oil giant like BP, producing at a much higher volume of barrels daily, not all leaking either.

In BP's 2009 annual report, the company provided data that shows U.S. assets making the largest production increase of any production region in 2009.

Alaska is a U.S. oil and gas producing region for BP in which it has older assets, and BP's stake in Prudhoe Bay has been front and center in speculation about holdings that BP could sell.

BP operates 15 North Slope oil fields (including Prudhoe Bay, Endicott, Northstar and Milne Point), and four North Slope pipelines. The company also owns a significant interest in six other producing fields and in the Trans Alaska Pipeline System (TAPS). The North Slope region is the second largest resource for BP in the U.S., after the Gulf of Mexico.

BP was one of the original developers of Prudhoe Bay and holds a 26% interest that has been at the center of M&A chatter. In a bit of BP PR disaster history in the U.S., corrosion in an Alaskan pipeline led to a 2006 oil spill that went undetected for five days and leaked over 5000 barrels of oil. BP had to shut down its production at Prudhoe Bay for 6 weeks during the summer.

BP is also currently developing the Liberty Oil field, the largest undeveloped light oil field in its Alaskan portfolio. Production from Liberty is expected to commence in 2011.

Among North American assets slated for growth, it may be the Northern neighbor to the east of Alaska where a lucrative asset can be sold by BP.

In Canada, oil sands deals have been attracting a lot of attention from energy buyers. A Canadian oil sands company, Athabasca Oil Sands, recently went public in the largest North American IPO of 2010.

The Chinese national oil company, China Petroleum ( SNP), has been buying up Canadian oil sands assets and driving up prices.

BP has a joint venture with Canada's Husky Energy, the $2.5 billion Sunrise oil sands project. Conoco Philips ( COP) and Total S.A. ( TOT) also recently announced an expansion of Canadian oil sands projects.

China's national petroleum company bought a 10% stake in a ConocoPhillips project in April.

While Alaskan assets might be appeal in a BP deal, the U.S. government would probably not approve of a sale of domestic oil assets to China. However, given the recent activity in Canada, a deal involving BP's 50% stake in the Sunrise oil sands project would be a logical consideration, analysts say. "When you can get the Chinese involved you can get good pricing. National oil and gas companies are willing to pay higher prices than conventional peers of BP, because they have different motivations for acquisitions," said Argus Research analyst Phil Weiss.

BP also owns Canada Noel, a gas field that started producing in March.

Some big BP projects yet to bear fruit, like the Canadian oil sands, would probably be hard to part with given the untapped potential. The Rumaila project in Iraq might is an example of an asset that would be attractive to suitors, but one which BP might be reluctant to sell.

BP's main exploration and production activities in the Middle East are based in Oman, but it is the Rumaila project that is projected to have huge potential, and notably, it is a project where BP already works with Chinese energy interests. In November 2009, BP and privately held China National Petroleum entered into an agreement with Southern Oil Company of Iraq to expand production at the Rumaila. BP has a 38% working interest in the project.

Rumaila currently produces one million barrels of oil per day, but BP and its Chinese counterpart plan to invest $15 billion over the next 20 years to raise Rumaila's daily production to 3 million. At that level, Rumaila would be the second-largest oil producer in the world. The companies said that a 10% increase in the production from Rumaila will lead to recovery of all costs associated with the project's development. This is a type of asset that oil companies haven't wanted to part with because there is more potential coming down the pipe. There is a lower return initially, but it doesn't have a huge capital requirement either.

Another huge BP holding in a politically volatile area is its 50% stake in TNK-BP, Russia's third largest oil company, which accounts for 17% of the country's oil production.

BP's net share of TNK-BP production is 840,000 barrels per day.

Billionaire investor Viktor Vekselberg, a principal shareholder in TNK-BP, recently told Bloomberg he thought BP would hold on to its investment in TNK-BP, calling the Russian venture a "brilliant" diamond in the BP's portfolio.

Yet Russia is not an easy operating environment. Need proof? When BP went looking for an executive with the pedigree to manage the worsening Gulf of Mexico oil spill crisis, it decided to hand the tough task to managing director Bob Dudley. Dudley's last job was managing the TNK-BP project.

BP already has some money coming in from recent former Soviet Union divestitures. BP sold its 46% interest in Kazakhstan's Tenzig Oil field and the Caspian Pipeline Consortium in December 2009 to Lukoil for $1.6 billion, which it will receive in three installments over two years.

With some of BP's global assets, a primary distinction in willingness to sell could come down to whether BP is a primary operator.

Angola, for example, is BP's largest African producer, delivering 211,000 barrels of oil daily, and an area where BP is a major project operator. Angola also has the profile of a less restrictive regulatory regime, which for better or worse, might be something BP benefits from in the current environment.

Being an operator of projects provides an oil company with flexibility in decision-making and timing of projects. Whereas non-operating minority interests typically make the most sense to sell. Marathon Oil ( MRO), for example, recently sold 20% of an Angolan project operated by Total, which took its stake down to 10%. Analysts say it wouldn't have been surprising if Marathon had sold its entire non-operating stake.

For BP, a lower operator profile is in Algeria.

BP has been operating in Algeria since the mid-1950s and is the largest foreign investor in the country. Yet BP operates jointly with Norway's StatoilHydro and Algerian state firm Sonatrach.

It is impossible to cover every BP asset, and analysts say that capital intensive commitments to liquid natural gas plants, specifically in southeast Asia, could make a good case for asset sales.

It is also important to remember that there will be asset sales made by BP, but not because it is being forced to sell. Divestiture of maturing assets by oil giants, or non-core assets with high initial costs and long-term timelines to profits, are always among the annual M&A targets of capital intensive businesses, drilling deeper and in more unconventional places.

On a final ironic note, one BP business unit that the oil giant was interested in spinning off in recent years was BP Alternative Energy, the once proud standard-bearer of the Beyond Petroleum acronym. BP opted not to spin off the business when it felt that the market was not going to give it the full value that its alternative energy assets deserved. The value to BP of its alternative energy business now, though, may be more as a minor band-aid on its image, than a life-saving M&A carrot to dangle in front of salivating investment bankers and energy sector peers.
Oil Spill in Photos
Oil Spill in Photos

-- Reported by Eric Rosenbaum in New York. (Shanthi Venkataraman contributed reporting to this story.)

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