Deals Of The Week: BP Wins Shareholders Over With Extended Divestiture Programme

Oct.31.11 | About: BP p.l.c. (BP)

Following the frenetic mega-deals of last week, including Kinder Morgan’s (NYSE:KMI) $38 billion acquisition of El Paso and Statoil’s (NYSE:STO) $4.7 billion acquisition of Brigham Exploration, the pace of deals this week slowed to a crawl. While all the headlines are being grabbed by Q3 earnings figures, there was not a single deal over the value of $50 million. There were still however enough rumours circulating to have significant effects on shareholder sentiment.

In the midst of BP (NYSE:BP) reporting normalised earnings of $5.1 billion, the company also revealed that it planned to up its assets divestiture program to $45 billion and return more cash to shareholders. The result of the announcement caused an immediate 4.5% boost to the share price of BP before this was tapered by news of further delays to the company’s $7 billion sale of a 60% interest in Pan American Energy Corp, the largest divestiture so far in the company’s programme. The acquirer, Bridas Corp, and BP are both awaiting approval for the deal from Argentinean authorities and although neither party has indicated a desire to pull out so far, the deal deadline of November 1st is surely going to be missed, which would give Bridas Corp the power to recoup its $3.5 billion deposit plus an additional $700 million payment from BP.

Strong rumours were also circulating concerning Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B) allegedly being on the cusp of a bidding war with Reliance Industries for the acquisition of Valero Energy (NYSE:VLO). The move came as an unwelcome surprise for shareholders who responded via a limp share price performance as its peers prospered. When the economy undergoes a demand slump, a state which is looking increasingly likely with every new piece of economic data released on the market, it is the front line of the refining and marketing sector that gets hit the quickest and hardest. If the rumours are true, Shell is lining up a bid for a company operating in the most over-saturated refining market in the world. Moreover, a bidding war would erode any chances of acquiring the company on the cheap. The move would also be in stark opposition to the recent trend of demerging refining and marketing arms into separate companies as has been the case with Marathon Oil and ConocoPhillips.

There were further rumours that TNK-BP (TNKBF.PK) had finalised the acquisition of an asset offshore Brazil for $1 billion. The move would continue TNK-BP’s recent strategy of investing outside of Russia, a strategy that may prove to be wise after risking the wrath of Russian authorities by standing in the way of the failed BP-Rosneft deal in the Russian Arctic. The asset would add to TNK-BP’s current international portfolio of assets in Vietnam and Venezuela.

Amongst the deals that were actually confirmed this week, Arsenal Energy (OTCQX:AEYIF) acquired assets in Alberta and British Columbia from an undisclosed seller and Equal Energy (NYSE:EQU) divested Alberta, British Columbia and Saskatchewan assets to an undisclosed acquirer. Despite the high chances that the two announcements were actually concerning just the one deal, each side turned down the opportunity to disclose this publicly in their press releases. From the details that were disclosed, the price per producing boe equated to $26,000, roughly half the price of other deals with an oil weighting similar to the 50% that this deal represented. To assume that this metric meant that the deal was a bargain, however, would be premature as the reserve life index of the assets is less than 5 years long, even after including probable reserves and a cost per proven and probable boe equates to C$16.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.