By James Herron and Laura Hurst
The transaction means BP hits its target of selling $15 billion of assets ahead of schedule, as the oil industry faces immense financial pressure from the coronavirus crisis. The company recently made its biggest write-off in a decade and said it would lay off 10,000 staff by the end of this year.
The announcement comes just months after new Chief Executive Officer Bernard Looney set the London-based energy giant on course to eliminate its carbon emissions by 2050, a radical step that has since been followed by its peers.
The deal is “the next strategic step in reinventing BP,” according to a company statement issued on Monday. It will “further strengthen BP’s balance sheet and delivers its target for agreed divestments a year earlier than originally scheduled.”
BP shares rose as much as 3.1% and were trading at 314.2 pence as of 12:27 p.m. in London.
Defend the Dividend
Despite poor margins recently, petrochemicals is generally seen as a resilient long-term part of the oil business, Bloomberg Intelligence analyst Will Hares said in an interview. Given poor conditions for the sale of exploration and production assets, “this deal could be a sign that BP is doing its best to defend the dividend.”
Following Royal Dutch Shell Plc’s surprise dividend cut last quarter, analysts have increasingly warned that BP’s payout could suffer the same fate. The company’s gearing — a measure of net debt to equity — has soared, while its dividend yield remains stubbornly above 10%, suggesting investors expect a cut.
The much-needed cash won’t hit the company’s coffers for some time. Ineos will pay BP a deposit of $400 million, and a further $3.6 billion on completion. An additional $1 billion will be deferred and paid in three separate installments of $100 million in March, April and May 2021 with the remaining $700 million payable by the end of June 2021.
BP also restructured the sale of assets to Hilcorp Energy Co. and Premier Oil Plc earlier this year, which in both cases will result in phased payments.
The deal stands out against its peers, such as Shell and Exxon Mobil Corp., which have poured money into petrochemicals, one of the few areas of future growth for oil demand. But BP was already a smaller player in the sector, having sold its petrochemicals and refining business Innovene to Ineos in 2005 for $9 billion.
The deal “makes strategic sense” from the company, consultant Wood Mackenzie Ltd. said.
“BP held onto these assets in 2005 when they were making strong profits,” Steve Jenkins, vice president of Wood Mackenzie’s petrochemicals team, said in a note. “Now these chemicals businesses are struggling with over-capacity and BP is urgently raising cash.”