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BP Breakup Worth $100 Billion to JPMorgan

By Brian Swint – Jul 25, 2011 12:01 AM GMT+0100

Robert Dudley (right) could unlock $100 billion for BP Plc (BP/) investors by following ConocoPhillips and splitting up Europe’s second-biggest oil producer.

BP, trying to recover from last year’s Gulf of Mexico disaster, has lagged behind its three larger rivals this year, rising 1 percent in London even as oil peaked at $127 a barrel. Conoco’s decision last week to split its refinery arm from its exploration and production business led analysts at banks including UBS AG, Bank of America and JPMorgan Cazenove to recommend BP look at a similar move.

Chief Executive Officer Dudley’s efforts to revive BP have been undermined by a failed exploration deal with Russia’s OAO Rosneft and the prospect of billions of dollars of fines from the spill. JPMorgan Cazenove said last week BP’s assets are worth about about 800 pence a share, equal to a total market value of about $248 billion. The company currently trades at about $147 billion.

“On a sum of the parts basis, BP is ludicrously undervalued,” said JO Hambro Capital Management Group Ltd.’s Clive Beagles, who helps manage 3.8 billion pounds ($6.2 billion) of securities including more than 100 million pounds of BP shares. “Perhaps that means they need to take as radical a route as ConocoPhillips (COP), or articulate a better strategy.”

BP’s 40 percent discount to the total value of its assets compares with an industry average of 27 percent, JPMorgan Cazenove analyst Fred Lucas said.

ConocoPhillips’s spin-off plan follows a similar move by Marathon Oil Corp. (MRO) Shares in Houston-based Marathon have gained 23 percent since it announced its split on Jan. 13 even as a new refining company with a market value of $14.4 billion was created.

Macondo Spill

BP shares are down 28 percent since the Macondo oil spill, compared with a 13 percent gain for shares of larger rival Royal Dutch Shell Plc (RDSA) over the same period.

BP spokesman Robert Wine said the company has no plans to split up its refining and marketing operations, known as downstream, and the so-called upstream business of exploration.

“The principle of a split deserves a good airing,” said Ivor Pether, a fund manager at Royal London Asset Management, who has about 300 million pounds invested in BP. “The U.S. government would block any such proposal while Macondo liabilities are outstanding, but there are enough notes out there on the possibility to merit a considered response.”

BP may report a profit of $6 billion for the second quarter on July 26 after a record loss a year earlier, a Bloomberg News survey of 10 analysts shows. Two days later, Shell will probably say profit was $6.6 billion for the period, compared with $4.5 billion in the second quarter of 2010.

Legal & General

“Conoco spinning out downstream activities keeps the debate going about the benefits of integration,” said Tim Mann, a fund manager at Legal & General Group Plc (LGEN), the second-largest shareholder of BP and Shell. “For Shell there will be a lot of focus on project delivery, and investors will be interested in any signals on the dividend now a major investment phase is completing.”

Shell sold its first cargo from the Pearl gas-to-liquids plant in Qatar in June. The project, the product of a $19 billion investment, will reach full capacity next year.

Shell will raise its dividend to 46 cents a share from 42 cents a share over the next two years, according to data compiled by Bloomberg based in part on options trading. BP will maintain its dividend at 7 cents a share, half the pre-spill level, until at least 2013.

BP has spent more than a decade paring down its refining arm because of overcapacity in Europe and the U.S. BP plants can process about 2.7 million barrels of crude a day, down from 3.2 million barrels in 2000. The proposed sale of two of its five U.S. refineries will subtract about another 700,000 barrels of capacity.

Upstream Breakup

“Once they’ve sold Carson and Texas City, they won’t have much refining left and it would be difficult to exit completely,” said Iain Armstrong, an analyst at London-based broker Brewin Dolphin that holds about 70 million BP shares. “Why not break up into various upstream businesses? Bob has steadied the ship, but it should be doing better than this.”

Since taking over in October, Dudley has overseen the sale of $25 billion upstream assets in Argentina, Colombia, Pakistan and Vietnam and said he will focus the company on exploration. He signed a $7 billion deal with Reliance Industries Ltd. (RIL) to explore offshore India. The proposed $8 billion tie-up with Rosneft to explore Russia’s Arctic Kara Sea was blocked by the billionaire partners in the TNK-BP venture.

“Splitting up an oil company can make for quicker decision times as well as sharper capital and other resource allocation,” said Andrew Steinhubl, a partner at management consultant Bain & Co. in Houston. “Whether the model fits for the larger companies remains to be seen.”

To contact the reporter on this story: Brian Swint in London at [email protected]

To contact the editor responsible for this story: Will Kennedy at [email protected]

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