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BP set for overhaul as it seeks cash to pay for oil spill crisis

Telegraph.co.uk: Which assets will BP sell and what shape will the oil giant take after the Gulf of Mexico spill?

By Rowena Mason, Energy Correspondent
Published: 9:29PM BST 18 Jun 2010

Protesters hold a banner that reads ‘Seize BPs Assets’ in front of the White House on June 16 Photo: GETTY IMAGES

The wounded BP behemoth will take many years to get back on to its feet after the Gulf of Mexico oil spill. In the meantime, a number of scavenging rivals are likely to be circling around the scraps of assets it must offload to pay for the crisis.

BP’s market value has almost halved to £67bn since the Deepwater Horizon rig sank on April 20. Its growth prospects in the US are looking grim and analysts believe the costs could range anywhere from $30bn to $100bn (£67.5bn) – given the litigation and fines it’s facing.

“It has now become impossible to put a figure on how much it will cost BP, but the company does at least have many restructuring options open to it – from asset sales to juggling around joint ventures,” says David Wilton, a partner at restructuring firm BTG Mesirow.

One thing is for sure: post-oil spill, BP will look very different to the £123bn company that last year overtook the traditionally dominant Royal Dutch Shell to become Europe’s largest oil company. The most noticeable consequence is that BP will be a much smaller, less fighting-fit company for some time, according to analysts at Bank of America Merrill Lynch.

“[The accident] will materially erode BP’s competitive advantage versus peers for the foreseeable future,” they say, leaving its rivals like Shell and Exxon hungry to profit.

The most visible change to BP’s shape involves its pledge to sell $10bn of assets – a sizeable chunk of its $235bn balance sheet that comprises $140bn of oil and gas fields, $82bn of refineries and petrol stations, plus $18bn of “other businesses” including shipping and renewable energy.

Although the company has refused to specify which parts of the business will be sold, Byron Grote, BP’s chief financial officer, this week outlined the company’s “very, very conservative” plan to shave off its most peripheral assets, suggesting that disposals would come from the sale of older, producing fields.

Downstream businesses such as refining and petrol stations have been less profitable during the recession, but there is already a huge number of refineries on the market in Europe and the US – with Total and Shell both trying to reduce their portfolios. It has also been suggested there would be few buyers for BP’s tarnished petrol station brand.

City analysts believe BP could first seek to divest non-operating and joint venture stakes that would be easy to disentangle from their core businesses.

In recent days, there has been fervent speculation that BP will sell its stake in Russia’s largest oil producer, Rosneft, worth around $1bn, amid rumours the company has hired Standard Chartered to oversee sales. Russia’s deputy prime minister, Igor Sechin, said the government would consider buying the stake should it need to be divested.

There has also been speculation surrounding BP’s mature North Sea production, and analysts believe there are smaller players that could pay more attention to the old fields, sweating the assets at the end of their lives.

Jason Kenney, an oil and gas analyst at ING, said two potential areas for sales are the North Sea and onshore in America, perhaps in Alaska.

“There is perhaps a sense that BP had too many eggs in one basket in the US,” he said. “As for the North Sea, I remember when they sold the Forties fields to Apache in 2003 and that had previously been considered a sacred lamb.”

“I wouldn’t be surprised if BP withdraws from the North Sea altogether,” said one oil and gas banker based in the US. “However, there are not many buyers for such fields at the moment. Another potential area for disposals is US onshore shale gas, which is attractive because there are a whole bunch of buyers.”

It is unlikely that BP would divest any large, cash-generative fields, such as Thunder Horse, which produces 200,000 barrels in the Gulf of Mexico each day – despite the political sensitivity around deepwater drilling in the area. It is also expected to be keen to hang on to deepwater plays in Brazil and Angola, plus its onshore assets in Azerbaijan, given that it will not face the same regulatory backlash that has emerged in the US.

Neither would a disposal of its interest in TNK-BP, the Russian joint venture that accounts for 33pc of oil revenues, be a feasible option, given that it will want to maintain diversity beyond the US.

However, analysts believe one major winner could be another London-listed company – BHP Billiton – if BP decides to reduce its stakes in major deepwater fields. Clarke Wilkins, a Citigroup analyst said: “In the event that some of BP’s assets in the Gulf of Mexico are shaken free, we think BHP would be in a prime position to increase its stakes in Atlantis, Mad Dog and Gunflit [in which we value BP’s share at $11bn].”

Other potential easy disposals include BP’s controversial 50pc stake in the Sunrise tar sand projects and its 17pc stake in the Northwest Shelf liquefied natural gas project in Australia.

It is by no means certain that the upstream divestments would be limited to oil and gas. Perhaps the most peripheral of assets for BP is its renewables business, which has already been scaled back since the heyday of former chief executive Lord Browne.

The division containing renewables and “other business” made a $2.3bn loss last year, raising questions over whether a company under such pressure can afford to keep unprofitable units.

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