A Spin-Off In The Cards For BP?

by Trefis Team
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As opposed to its counterpart, Royal Dutch Shell that reported stellar earnings last week, the market expects BP Plc. (NYSE:BP) to post a weak set of financial numbers for its June quarter 2017 on 1st August 2017((BP To Announce June Quarter 2017 Results, www.bp.com)) due to the slowdown in the recovery of commodity prices during the quarter. However, the company’s downstream operations are expected to partially offset the impact of weaker upstream operations and keep the company’s profits in the black for the quarter.

Apart from the financial performance, the investors are keeping a close watch on the second quarter earnings release as it is rumored that the company is contemplating the spin-off of its Midwest and Gulf Coast pipelines to form a master limited partnership (MLP) and file for an initial public offering (IPO) to raise cash for its operations. This move, if turned into a reality, could prove to be a huge upside for BP and its stock, as this will not only allow the company to avoid paying corporate taxes, but will also enable it to earn extra income from the new company in the form of tax-deferred distributions (similar to dividends).

See Our Complete Analysis For BP Plc. Here

Key Trends Witnessed In 2Q’17

  • The rally in crude oil prices due to the OPEC production cuts came to a halt as the US oil production and inventory levels rose sharply in the second quarter. As a result, the WTI crude oil prices dropped from an average of $52 per barrel in the first quarter of 2017 to $48 per barrel in the latest quarter. Consequently, we expect BP’s upstream price realization for the quarter to be lower than that of the previous quarter, impacting its June quarter revenues on a sequential basis. However, as mentioned earlier, the company’s downstream operations is expected to partially offset the negative impact of its weak upstream performance.

Source: Google Finance; US Energy Information Administration (EIA)

  • On the operational front, BP has announced four new gas discoveries year-to-date 2017. In the first quarter, the company announced the Qattameya discovery in Egypt, making it the third gas discovery on the North Damietta Offshore concession, where the company is already developing the Atoll field and appraising the Salamat discovery. In May, BP and partner Kosmos Energy announced a major gas discovery with the Yakaar-1 exploration well, which further confirms offshore Mauritania and Senegal as a world class hydrocarbon basin. Finally, in June, BP Trinidad & Tobago (bpTT) made two significant gas discoveries with the Savannah and Macadamia exploration wells, offshore Trinidad, which are expected to unlock approximately 2 trillion cubic feet (tcf) of gas and are likely to augment BP’s long-standing business in Trinidad.
  • Owing to the depressed commodity prices, the economics of several oil and gas plays have deteriorated drastically over the last three years. Consequently, BP has decided to relinquish its 50% interest in Block 24/11 offshore southern Angola, after the gas discovery was found to be uneconomical. Accordingly, the company expects to have charge a non-cash exploration write-off of around $750 million in its second quarter results.

  • Given the uncertainty in the commodity markets, BP will continue to restrict its capital expenditure between $15-$17 billion in 2017 and beyond, depending on the recovery in commodity prices. Further, the company will stick to its divestment program, with an aim to close asset sales of around $5 billion in 2017, and $2-$3 billion in the remaining years of this decade. These deals will allow the company to streamline its portfolio and fund its capital investment needs.

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