The Independent: Outlook: A problem with chemistry as BP opts for IPO

By Jeremy Warner

28 April 2004

If BP's Lord Browne of Madingley wants to get shot of his low return but capital intensive chemical interests, why doesn't he simply demerge them? Granted, it would be hard to sell a business of this size to a trade buyer in what remains a largely bombed out industry, but is it really necessary to go to the expense and bother of an IPO?

People invest in BP as an oil company, Lord Browne insists, and they would therefore be unlikely to want to hold shares in a pure chemicals enterprise. If BP went the demerger route, the price might collapse as large numbers of shareholders offloaded their unwanted chemical shares, and everyone would end up worse off.

By floating off a minority, BP maintains a share in any upside while immediately delivering a fresh injection of capital that can be used for equity buy-backs. I find the argument only half convincing. In a demerger, the market decides where the value lies. If investors dump their stock at an undervalue, that's their look out. Some other clever chappy will reap the benefit.

Still, at least Lord Browne isn't intending to spend the money on some hare-brained new business escapade in a far away land, as happened when National Grid sold down its shares in Energis. A large part of the money was spent laying telephone lines across the Amazonian jungle. Those that weren't eaten by parrots never made a dime.

BP is already throwing off surplus capital by the bucket load. The money raised from floating Olefins and Derivatives will further swell the pool of capital available for share buy-backs. The more capital that's bought back, the greater the return on what remains. The removal of the low-returning chemicals business alone will significantly boost the group's overall averages, which in itself must be worth a couple of mill on Lord Browne's bonus. But let's not get too cynical here. Shell has already done quite enough for the cause of cynicism in this trouble shooting industry. By contrast, BP stands out as a beacon of switched-on management and shareholder value. The ever-widening valuation gulf with Shell is richly deserved. Shell reports first-quarter results tomorrow. Many expect them to confirm that output has sunk below that of BP for the first time anyone can remember. How are the mighty fallen.

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