A GCC wealth fund should bid for BP
Matein Khalid / 23 May 2011
BP’s footprint in the Gulf states goes back a century, to the time of the first oil strikes in Qajar Persia, the Royal Navy’s conversion from coal to oil during the World War One, the Crown’s controlling shareholding in the legendary Anglo-Persian Oil Company (APOC), to the oilfields gusher of Kuwait and Iraq and the LNG terminals of Qatar.
This is the perfect opportunity for a GCC sovereign wealth fund, ideally from Abu Dhabi, to take a strategic stake in a wounded Seven Sister colossus of Big Oil. After all, Kuwait once built a stake in BP but was forced to divest by the protectionist Thatcher government. Yet the strategic case for BP is compelling now. Why?
BP is now the most undervalued major oil firm in the world, trading at an incredible 50 per cent below its NAV. This is a sad testament to a decade of mismanagement and strategic blunders under Lord Browne, Tony Hayward and now, sadly William Dudley. The Deepwater Horizon disaster in the Gulf of Mexico, the subsequent environmental and public relations disaster and now the collapse of the January 2011 share swap agreement with Rosneft after a successful court injunction by its billionaire oligarch partners in the BP-TNK venture. The collapse of the Rosneft deal is an epic blow for BP because it denies its access to offshore acreage in the Kara Sea, the epitaph to its upstream growth prospects in the Russian Arctic.
The Renova oligarchs killed BP’s Rosneft deal but BP cannot abandon its 50 per cent stake in TNK-BP, since it contributes one third of its proven reserves and one tenth of its profits.
BP’s valuation metrics have still not recovered from its April 2010 oil spill disaster even though crude oil prices are sharply higher since that time. Yet BP still trades at a significant discount to Big Oil, at a mere seven times current earnings and an almost four per cent dividend yield. The BP dividend can rise significantly in the next five years, as it was cut to pay the Macundo liabilities, a $20 billion fund created at the insistence of the Obama White House.
BP has among the lowest production costs in Big Oil, took a $41 billion non-operating charge in 2010, has engineered the sale of $22 billion in non-core assets and has some of the world’s most attractive production and exploration assets in Angola, Azerbaijan, Canada, Iraq, Norway, Russia, Trinidad, the US, Qatar, Brazil,
and Australia. Its Indian offshore gas exploration deal with Reliance’s Mukesh Ambani symbolises its new Asian focus. BP is the ultimate, integrated Big Oil supermajor, with production, exploration, trading, natural gas/LNG, power, gas to liquids, petrochemicals and alternative energy businesses spread across the planet. Even though its woes in the Gulf of Mexico and Russia will slow production growth in its pipeline now even as it plans to sell its Texas and California refineries in 2012, exiting the US downstream business.
BP, with its US legal liabilities and Russian geopolitical dilemmas, is a clear high risk investment for a GCC sovereign wealth fund but it offers huge strategic synergies to an oil producing emirate that seeks a global presence in the world’s most attractive markets. As Abu Dhabi’s Taqa demonstrated, it is almost impossible to build a scalable energy major from a start up. Yet BP is one of Big Oil’s stellar cash generating machines Mitsui’s $1.1 billion settlement with BP for the doomed Macondo well (the Japanese trading house owned 10 per cent of the well) is also a positive as litigation risk is a sword of Damocles on the shares. This enables BP to pressure Transocean and Anadarko.
Researched and compiled by MATEIN KHALID. Mr Khalid is a fund manager, a Wharton MBA and Director of a securities firm. He can be contacted at: firstname.lastname@example.org
This means that there is a high probability that the Gulf of Mexico liabilities will be revised lower even as the dividend payout is hiked higher, though gross negligence damages in the US courts and Kremlin politics were a wild card. I recommend the BP New York ADR in this column at $34. It is now $45. I think BP trades at $60 in the next twelve months.