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BP breakup could unlock $100 bn, says JPMorgan

Read more on:    Onocophillips | Jpmorgan | Robert Dudley | Bp Plc
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could unlock $100 billion for 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 per cent in London even as oil peaked at $127 a barrel. Conoco’s decision to split its refinery arm from its exploration and production business led analysts at banks including UBS AG, Bank of America and 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 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, or articulate a better strategy.”

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

Marathon Gains
ConocoPhillips’s spinoff plan follows a similar move by Marathon Oil Corp Shares in Houston-based Marathon have gained 23 per cent since it announced its split on January 13 even as a new refining company with a market value of $14.4 billion was created.

BP shares are down 28 per cent since the Macondo oil spill, compared with a 13 per cent gain for shares of larger rival Royal Dutch Shell Plc over the same period. BP rose 0.5 per cent to 472.5 pence as of 8.50 am in London. Shell dropped as much as 0.6 per cent.

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 US 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.”

Profit Forecasts
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.

“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, 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.

Dividend Outlook
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 US 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 US refineries will subtract about another 7,00,000 barrels of capacity.

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