Should BP Split itself Up

abarrelfullabarrelfull wrote on 02 Aug 2011 09:17
Tags: bp conoco marathon

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The Economist asks the ultimate questions about BP this week; Should BP split?. It quotes an analyst who claims that BP is currently $100 billion below its net asset value.

Of course it was Marathon Oil, that started this whole debate. Marathon is now trading as two separate companies. Following in their example was Conocophillips. The CEO stated the logic behind the deal as:

"Consistent with our strategy to create industry-leading shareholder value, we have concluded that two independent companies focused on their respective industries will be better positioned to pursue their individually focused business strategies,"

The Economist questions the wisdom of this approach, saying that splitting is difficult and would not solve the problems, rather they say:

Rather than splitting in two, a better bet would be to sell assets one by one to Asian or Russian oil firms with deep pockets and global aspirations.

However I think they miss the point entirely. Splitting is all about focus. There is little synergy between upstream and downstream, businesses that are fundamentally different and need completely different business cultures.

The number of Asian or Russian acquirers of downstream assets is limited and the supply of refiners potentially for sale is large. Selling under such conditions leads to low sale values. A focused management team would almost undoubtedly be able to generate greater value whether selling or operating the assets.

The only reason that companies have been so unwilling to go down this route is inertia. The strategic logic of vertical integration disappeared decades ago. Now if BP would just bite the bullet, they have $100 billion in value to unlock.

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