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THE WALL STREET JOURNAL: Breaking Views: BP

Mar 17th, 2006
by admin.

BP
Is nothing sacred? One of the more radical ideas to tickle investors' fancy lately is the notion that the big Western oil firms should break themselves up. In an industry where scale brings benefits, the notion smacks of sacrilege. In fact, it makes good sense.
Simply put, the oil majors are too big. Most combine upstream and downstream operations that have little good reason to belong together — except for history. Exxon Mobil's $370 billion market capitalization makes it the largest firm in the U.S. BP accounts for almost 10% of the FTSE 100 alone. Few oil executives believe that there are any real industrial and financial benefits from keeping their high-growth exploration activities together with their lower-growth refining and marketing businesses. But none has yet openly suggested they should be broken up. It is time that they did.
This is more than financial gimmickry or broking whimsy — although in BP's case house broker Cazenove reckons such a breakup would remove a conglomerate discount worth $50 billion. Greater specialization would sharpen management focus, spur efficiency and boost transparency. Would Royal Dutch Shell have had that reserves' problem if its exploration unit had been separate? Maybe not. And splitting-up did wonders for the old British Gas. Since BG demerged from Lattice, shares in the oil and gas firm have almost quadrupled. Meanwhile Lattice, having merged with National Grid, has seen its share price rise by a quarter.
There might be qualms about sacrificing national champions on the altar of shareholder value. But even after such a split, BP's E&P division would still be worth some $200 billion — hardly a minnow. And how useful is national-champion status anyway? When it comes to accessing reserves in foreign countries, such as Russia or Libya, this knife can cut two ways; it depends on diplomatic relations at the time.
Furthermore, oil-services firms like Schlumberger, with its studied national neutrality, offer oil-producing countries much the same technology and project-management skills that majors boast is their unique selling point. Yet Schlumberger's share price has outperformed BP's by almost 60% since oil prices took off three years ago. By shrinking, the majors could grow again.
–Hugo Dixon, Camilla Palladino and John Paul Rathbone

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