British Petroleum agrees to sell its Petrochemical Business to INEOS

On 29th June 2020 British Petroleum announced that it has agreed to sell its global petrochemicals business to INEOS for a total consideration of USD 5 billion, subject to customary adjustments. The agreed sale, the next step in reinventing British Petroleum, will further enhance BP’s balance sheet and deliver its target for agreed disinvestments a year earlier than originally scheduled.

Under the terms of the agreement, INEOS will pay BP a deposit of USD 400 million and will pay a further USD 3.6 billion on completion. An additional USD 1 billion will be deferred and paid in three separate installments of USD 100 million in March, April, and May 2021 with the remaining USD 700 million payable by the end of June 2021. Subject to regulatory and other approvals, the transaction is expected to complete by the end of 2020.

“I am very grateful to our petrochemicals team for what they have achieved over the years and their commitment to BP. I recognize this decision will come as a surprise and we will do our best to minimize uncertainty. I am confident however that the businesses will thrive as part of INEOS, a global leader in petrochemicals” said Bernard Looney, CEO of BP.

Over the past two decades, INEOS has acquired a number of businesses from BP, most notably in the year 2005, USD 9 billion purchase of Innovene, the BP subsidiary that comprised the majority of BP's then chemicals assets, and two refineries.

Brian Gilvary, BP’s chief financial officer, said: “With today’s announcement we have met our USD 15 billion target for agreed divestments a full year ahead of schedule, demonstrating the range and quality of options available to us.”

BP’s petrochemicals business is focused on two main businesses – aromatics and acetyls – each of which has leading technology and advantaged manufacturing plants, including a strong presence in growth markets in Asia. Together, the two businesses have interests in 14 manufacturing plants in Asia, Europe, and the US, and in 2019, these 14 plants produced 9.7 million tonnes of petrochemicals.

BP’s aromatics business is a global leader in the production of purified terephthalic acid (PTA), a key feedstock for the manufacture of polyester plastics, and its precursor paraxylene (PX). The business’s largest manufacturing plants are in China, the US, and Belgium and it licenses its leading PTA production technology to producers around the world.

The acetyls business produces acetic acid and derivatives such as acetic anhydride, which have uses in a wide range of sectors. The sale will also include related interests such as the chemical recycling technology BP Infinia and BP’s interest in acetylated wood developer Tricoya.

In total, the businesses included in the transaction currently employ over 1,700 staff worldwide. This staff is expected to transfer to INEOS on completion of the sale. This agreement means that British Petroleum has now agreed to USD 15 billion of divestments and other disposals through 2019 and 2020 to date, an amount originally expected to be reached by mid-2021. 

On the surface, the changes it's making are good news -- but when you dig in a little bit deeper, there are risks that could play out over the longer term. 

Investors are taught that diversification is good for their portfolios because it spreads the risk around. That same idea plays out at the corporate level: Companies look to have operations in more than one industry or across different industry segments. For companies like BP, that means owning assets from the drilling (upstream) area of the energy sector all the way to the chemicals and refining niche (downstream). To be fair, COVID-19-related demand disruptions have left every part of the energy sector in a downturn, but historically when oil prices are low, downstream businesses benefit from reduced input costs. That, in turn, helps offset the top- and bottom-line pain of weak energy prices. 

This is the model that most of the world's largest energy companies use, which is why they are often referred to as integrated energy giants. Note that these companies, including BP, are not just diversified across the energy sector -- they're also diversified geographically. So BP spreading its bets around is a key piece of the company's story. In fact, the energy giant is one of many that is starting to invest in renewable power, including solar, wind, and biofuels. BP and the others want to make sure they have their fingers in as many energy pies as possible. 

However, today's industry downturn is unusually deep, with the price of oil actually falling below zero at one point in early 2020. There were technical reasons for that, but for a brief point in time oil producers were paying customers to take oil off of their hands. Oil prices have recovered but remain at historically low levels. Even industry giants including BP are struggling to cope with the current conditions. It's taking drastic steps, including the recently announced USD 5 billion sales of petrochemical assets.

BP has a heavy debt load and is looking for ways to trim the burden. It laid out plans to sell USD 15 billion worth of assets, and the current disposition allows it to reach that goal a year ahead of its original plan. With the entire energy industry facing headwinds, it's hard to argue about the value of solidifying BP's balance sheet so it can survive this storm. In this way, it's expected to be a good call. 

Moreover, when it announced the sale, BP highlighted, "Strategically, the overlap with the rest of BP is limited and it would take considerable capital for us to grow these businesses." Again, on the surface, it sounds like a great call to raise cash by selling non-strategic aromatics and acetyls-producing assets. Moreover, abandoning these businesses will mean freeing up cash for growing the company's core operations. 

However, from a bigger-picture perspective, BP is pulling out of businesses that diversify its portfolio. Effectively these businesses were customers for the company's upstream products. Though perhaps not directly using the oil and natural gas BP drilled, historically, having these businesses allowed the company to benefit (from buying relatively cheap oil to process) when falling oil prices were putting downward pressure on its upstream operations.  With regard to future investment, BP is now limiting its set of growth options. Yes, there might be material expenses involved, but if the returns are high enough (perhaps not now, but some time in the future) that would be a much less important issue.

And more to the point today, by slimming down its downstream operations, BP is effectively making a bigger bet on its upstream business. Oil prices are notoriously volatile, so this move will likely increase the ups and downs investors have to deal within the company's earnings in the near term. As noted above, in more normal times, downstream operations are a vital offset to energy-price volatility.

All in all, there are positives and negatives associated with this decision. It is not a clean win.

 

This is part of our Petrochemical Intelligence Hub. For more details about the service, please get in touch here.