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The Independent: Petrochemicals spin-off could return 4.5bn to BP investors


By Saeed Shah

28 April 2004


BP unveiled plans yesterday to spin off half of its petrochemicals business in a deal that could be worth up to $8bn (4.5bn) to shareholders.


The news came as the oil giant reported a 17 per cent jump in first quarter net profits to $4.7bn, compared with the same period in 2003. Oil and gas output topped 4 million barrels of oil equivalent a day for the first time in more than 30 years.


However analysts pointed out that, stripping out exceptional items, the profit figure was $3.4bn, which was lower than the $3.7bn achieved in 2003 for the quarter.


The company said it wanted to divest about half of its petrochemicals portfolio, probably through an initial public offering. This business, known as Olefins and Derivatives (O&D), has a book value of $7bn. BP could add $1bn of other businesses from its operations in the sector, in fabrics and fibres, that have already been put up for sale. BP said the returns of the O&D business had been poor for years. The money raised will be returned to investors via a share buyback.


Lord Browne of Madingley, BP's chief executive, said: "When we have excess cash, it goes straight back to shareholders. Now things are working [for us]. The cost base is under control. We are fortunate with the high oil price. This [buyback] would be a reward for shareholders who have been patient."


The O&D business makes plastics materials that are sold to the manufacturers of goods such as polythene and plastic pipes. The rest of the chemicals interests, the so-called "advantaged products" business, makes more sophisticated chemicals and materials, with better market positions and propriety technology, that are used for making goods such as polyester and plastic bottles.


The IPO is planned for the second half of next year. Byron Grote, BP's chief financial officer, said the New York stock exchange would provide a "more natural home" for the listing, rather than London. He said US investors were more receptive to chemicals businesses.


The O&D division will be separated into a stand-alone entity before the IPO. Analysts pointed out that this would have the effect of flattering the figures on the returns achieved by the remaining BP group almost immediately. Lord Browne said that spinning off the business was a more attractive option for BP's shareholders than simply demerging O&D and giving investors shares in it. "Investors in BP are investors in the oil and gas sector, not in the petrochemicals sector as a pure play. You don't give shares to people who don't want them," he said.


BP said it was possible that O&D could be sold instead, adding that it was already fielding inquiries. However, Mr Grote said the "balance of probabilities" was on a float.


Peter Hitchens, an analyst at Credit Agricole, said the move was a "tidying-up exercise which should be seen as part of BP's gradual evolution".


The underlying performance was held back by factors such as foreign exchange movements, depreciation charges and the higher cost of production from its newly acquired Russian assets.


Mark Redway, an analyst at Canaccord Capital, said the lower underlying performance, compared with 2003, came despite higher production and roughly similar oil and gas prices. He added that results from BP's troubled rival Shell for the same period, due tomorrow, might prove embarrassing for BP.


"Wait till Shell reports. Stripping out exceptionals and despite all its difficulties, Shell will probably report the same or better figures," Mr Redway said.

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