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BP Explores Pipeline Asset Sale to Form MLP & Make it Public

Integrated energy giant BP plc BP is contemplating spinning off some of its Midwest and Gulf Coast pipelines into a master limited partnership ("MLP") and filing for an initial public offering ("IPO") to raise cash. The MLP will incorporate pipelines of crude oil, natural gas, and refined petroleum products and will be called BP Midstream Partners. The company expects the regulatory process for the same to begin toward the end of the year.

The plan was originally proposed internally five years ago but put on hold due to the persistent weakness in oil prices.  The company had to reduce its capital spending over the past three years to counter the price drop.

BP expects this move to result in increased efficiency for the MLP and provide it with capital in favorable terms. This tax-avoiding corporate structure will help the MLP to generate more value for its unit holders while creating opportunities for the expansion of the pipeline business.

BP is yet to provide details on the valuation of the transaction. The company will retain general partner position of the MLP and the most of its limited partner interests. BP will also hold all of the MLP’s distribution rights, which will allow it to have greater control over the assets.

This kind of a move is not unprecedented in the space. BP seems to be following the footsteps of Royal Dutch Shell plc RDS.A, Valero Energy Corporation VLO, Tesoro Corporation TSO and Marathon Petroleum Corporation. Shell raised approximately $1 billion in 2014 through MLP IPO.

In this context, we would like to remind investors that the company operates in 48 states of the country and has almost 3,500 miles of pipeline. BP’s terminal facilities can transport and store more than 1.3 million barrels of oil equivalents per day (BOE/d), which include oil, refined products and natural gas.

Price Performance

In the last six months, the company’s shares have outperformed the Zacks categorized Oil and Gas - International – Integrated industry. The company’s shares lost 5.5%, while the industry registered a decrease of 7% in the same period.

About the Company & Zacks Rank

London-based BP is one of the world's major integrated energy companies that provides its customers with fuel for transportation, energy for heat and light; retail services and petrochemical products. BP has a strong portfolio of upstream projects that are expected to fetch significant cash flows. The company anticipates the projects to add 800 Mboe/d to net production capacity by 2020, once they are online. It is to be noted that 90% of these upstream developments are either under construction or are completed.

However, the oil spill incident of 2010 in the BP-operated Macondo Prospect is still affecting the company. Although BP has cleared the huge litigation expenses related to the spill, it had to divest some of its best operating properties. The asset sales might hinder BP’s future cash generating opportunities going forward. It is to be noted that the lost reserves/production from the group's asset sales cannot be ignored either.

As a result, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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