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Will BP's Asset Sale Strategy Hamper Profitability?

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On Apr 5, 2016, we issued an updated research report on oil major BP plc (BP - Free Report) .

BP announced divestiture of several non-core assets including interests in many North Sea oil and gas fields and in its Yacheng gas field in the South China Sea. BP’s announcement of the multi-billion dollar asset sale raises concerns regarding its production performance in the coming years.

With crude prices having plunged since Jun 2014, BP’s upstream division has been unable to extract substantial value for its products. This has pressured the group’s profit margins.

BP conducts operations in many countries. As such, the company is exposed to risks such as embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil unrest.

The company is offloading its non-core upstream properties while creating a portfolio with potentially stronger growth from a smaller base. BP has already sold the refineries in Carson, CA and Texas City, TX, thereby shedding half of its U.S. capacity. It has, however, retained three refineries – Cherry Point, Toledo (co-owned with Husky Energy), and Whiting – with the greatest competitive advantage. These refineries are expected to improve returns for the oil behemoth.
However, BP’s upstream margins are likely to be driven by its four main upstream profit centers – Angola, Azerbaijan, the North Sea and the Gulf of Mexico (GoM). During 2015, BP gained new access to Egypt and GoM as well as extended its ties with Rosneft in Russia. Three major upstream projects – one in Australia and two in Angola – were also brought online in 2015, while another in Algeria is expected to commence soon.
BP is on track with its divestment plan of assets worth multi-billion dollars. Additionally, the company expects to see increased exposure to heavy crude differentials in the U.S. owing to ramped up heavy crude processing at the Whiting refinery.

Stocks to Consider

Currently, BP carries a Zacks Rank #4 (Sell). Some better-ranked players from the energy sector are ReneSola Ltd. (SOL - Free Report) , FutureFuel Corp. and Enviva Partners, LP (EVA - Free Report) . Each of these stocks sports a Zacks Rank #1 (Strong Buy).

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