BP Sells Canadian Gas, Looking to Defend $55 Fair Value

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BP (NYSE:BP) agreed to sell its natural gas liquids business in Canada to Plains All American Pipeline LP for $1.67 billion in a bid to shore up its cash position to meet future obligations from the Gulf of Mexico spill incident. [1] The move is also seen as the company’s latest attempt to focus on the high returns upstream exploration business by selling off downstream assets. The deal which will include the sale of 4,000 KM of pipelines, fractionation facilities and a 21 million barrel storage facility. [2] Majors such as ConocoPhillips (NYSE:COP) have looked to focus on the exploration and production business as sustained high crude oil prices have made the sector an attractive investment opportunity.

We have a $55 price estimate for BP which is at a 30% premium to its current market price.

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Natural gas liquids business

The assets being sold under the deal also include special plants that can extract natural gas liquids (NGL) – a term used to denote gases like butane and propane that stay in liquid form in normal conditions. BP embarked on a program to sell some of its downstream assets to generate $30 billion in cash after the Macondo blowout to meet spillage costs and to reorganize its portfolio. To date BP is reported to have sold $19.2 billion of assets and announced earlier in October that it would accelerate the program and seek to boost cash payments to shareholders.

We have modeled the remaining cash payouts resulting from the spill to be spread over the next couple of years. Variations in the parameter have a significant impact on the overall valuation of the company.

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Notes:
  1. BP Sells Canada Gas Business for $1.67 Billion, WSJ []
  2. BP Sells Canadian Gas Assets to Plains for $1.67 Billion, SF Chronicle []