A Spinoff of BP’s Pipeline Business Is a Smart Move, But…
The good news is energy giant BP plc (ADR) (NYSE:BP) will soon be joining the likes of Valero Energy Corporation (NYSE:VLO), Royal Dutch Shell plc (ADR) (NYSE:RDS.A), Marathon Petroleum Corp (NYSE:MPC) and others, raising money by spinning off pieces of itself. The bad news is, it may not matter all that much… at least not yet.
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The company made the official announcement several weeks ago, informing all interested parties that BP Midstream Partners LP was being prepped for an initial public offering; the parent company has already filed the requisite form S-1 with the SEC. If all goes as planned, the new company will trade on the New York Stock Exchange under the ticker symbol “BPMP”.
The ultimate goal isn’t to get out of the midstream business, however. Indeed, the aim is establish a vehicle that’s better suited — and focused — to expand BP’s existing pipeline business. See, the parent company would still be a major stakeholder in the limited partnership, only selling a portion of it, though passing a fair amount of its debt along to the IPO’s investors.
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Not a Game Changer
Though the news is dated, details of the public offering are still relatively scant, with glimpses of several expert opinions being pieced together into one cohesive (if still incomplete) guess as to what the IPO will look like once it’s completed in the fourth quarter.
Perhaps first and foremost, though a specific figure hasn’t been offered, some have figured BP’s majority interest in the new partnership will still remain at a controlling 50%, while others have opined its stake could be as high as 60%. Based on Tudor, Pickering, Holt & Co.‘s estimated value of $1.6 billion for the soon-to-be-spun-off BP Midstream Partners, that would translate into net proceeds of roughly $600 million for the parent organization. Morningstar’s Allen Good foresees a little more value to BP for the deal, projecting it could pocket $650 million by selling a 50% stake.
Whatever the case, the total marketable value of BP Midstream Partners LP should only be on the order of a little more than $1 billion, and BP itself would collect much less than $1 billion in the spinoff. The parent company would, however, slough off roughly $500 million of its long-term debt to the newly-minted standalone company.
Nevertheless, BP is currently sitting on $55.6 billion in long-term debt; the upcoming IPO won’t even make a noticeable dent in that burden.
Just the Beginning
Then again, the process of setting up a new publicly-traded organization while still retaining control of most of it isn’t entirely for the purpose of immediately improving the appearance of the balance sheet. The initial public offering and subsequent partial spinoff may be more about establishing an effective means for the future sale of BP’s pipeline properties.
The initial version of the spinoff company will only include one onshore pipeline for crude, one refined products pipeline, one diluents pipeline, one offshore natural gas pipeline and a stake in four more offshore natural gas pipelines.
That’s only a fraction of the company’s pipeline network, though. All told, BP owns 3,500 miles worth of oil and gas pipelines. Once the new entity is established and operating, BP could use it as a vehicle to sell more pipelines too — and raise more money as a result.
It’s a win for future investors of BP Midstream Partners, though, not to mention current and future owners of BP stock. The limited partnership structure of the company to be spun-off is tax efficient, built from the ground up to maximize income. And pipelines (which are essentially gas and crude oil “tollbooths”) are already well-suited to dish out income. BP will be an investor in the new entity just like any retail investor would be, and will enjoy its tax-friendly distributions, even if they represent only a small part of the company’s net revenue.
Bottom Line for BP Stock
It’s interesting news to be sure, but, at least initially, BP stockholders may not even notice any before/after change. The scale of the deal is just too small to matter much.
In time, though, should BP choose to get out of more of its pipeline businesses by selling them to organizations the company controls but don’t pose a liability to the former parent, the upcoming IPO may well be the start of something big.
Just don’t hold your breath, because this is a very long-term project… and that assumes the long-term plan is to wade out of the pipeline business altogether.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
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