Attention knife-catchers… | FT Alphaville

Attention knife-catchers…

. . . because BP could try to protect shareholder value by de-merging its US operations.

That’s the view of Unicredit, which reckons a split is something that the board of BP has to consider, given that its business model (think deepwater exploration, the Gulf of Mexico, technical excellence) has been shredded by the Macondo oil spill:

In our opinion, the creation of separate US and RoW entities would increase transparency, thus allowing equity and corporate investors to decide BP’s fate. In more details:

BP US would define the worst case scenario of asset seizure, ring fence liabilities and vulnerable assets, offer upside potential from leverage to the rump value.

BP RoW would be able to operate, invest and pay dividends without the uncertainties surrounding the consequences of Macondo.

According to UniCredit BP US could afford to meet the cost of the spill — assuming it’s spun off without any debt.

Assuming the US entity is debt-free, we attribute a value of around USD 102bnto BP’s US assets (USD 82bn upstream, USD 20bn downstream). Our assumption that the net cost of the spill for BP is of USD 47bn, suggests a rump of USD 55bn (GBp 200 per share) for BP’s US assets. This brings to a SOTP value for BP of around USD 158bn or GBp 580 p.s., with a 90% upside potential vs. the current market price. Assuming that the value of BP’s US assetsis equal to the spill costs, the SOTP value of BP is around USD 100bn or GBp 380 per share, 25% higher than the current market price.

But as has been discussed before, firewalling BP’s North American operations won’t be easy, because its US subsidiaries are the domicile for many of the company’s international assets in (for example) Latin America, Trinidad and Tobago and Angola.

However, BP has to stop the bleeding somehow.

At any rate, BP shares were up in London on Monday — following a Sunday Times report that progress on the company’s relief wells was going faster than expected:

Related links:
The pension fund that’s not invested in BP – FT Alphaville
BP Turtle-gate – FT Alphaville
Portrait of an oil company in distress
– FT Alphaville