Analysts at a number of investment banks suggest that BP plc (NYSE: BP) follow the lead of ConocoPhillips Corp. (NYSE: COP) and Marathon Oil Corp. (NYSE: MRO) in splitting off the company’s downstream refining and marketing operations from the upstream exploration and production business. Marathon’s refining and marketing spin-off, Marathon Petroleum Corp. (NYSE: MPC), began trading separately about a month ago.

The analysts’ calls are based on serious under-valuation of BP’s assets. One analyst puts the value of BP’s assets at about $248 billion, while the company’s current market cap is around $145 billion. That $100 billion difference could be unlocked by splitting the company. Or could it?

BP is still a long way from recovering its footing from the explosion at its Gulf of Mexico Macondo well in April 2010 that killed 11 workers and dumped 5 million barrels of oil into the sea. There is virtually no chance that the US government would approve any proposal to split up BP until substantially all the company’s liabilities from the Macondo disaster are toted up. So far, BP has sold off about $25 billion in assets to finance the clean-up and pay damage claims, but a final determination of the company’s liabilities remains in the future.

One might also argue that when BP’s shares hit a bottom in late July last year ($34.16 on US-traded ADRs), the market was over-reacting. Shares lost about 55% of their value from before the Macondo spill. Since then, ADRs have recovered to more than $46, about 35%.

At least some of that gain is due to substantial improvement in refining revenue and margins. Because the crude market is now being driven by the price of Brent crude, BP’s access to WTI crude at its Midwestern US refineries gives the company a built-in discount of somewhere around $10/barrel on its feedstock. Like all good things, this may not last forever, but while it does its a good thing for BP.

Both Marathon and Conoco chose to use this moment of high refining margins to spin-off their refining and marketing operations. But the still-uncertain issues of BP’s total liability for the Macondo spill aren’t the only issue.

BP is once again being thwarted in Russia. It’s attempts to get a foothold in the development of Russia’s Arctic offshore resources have been foiled by a group of investors in TNK-BP who are seeking billions of dollars for damages done to TNK-BP as a result of BP’s stock swap offer to Russia’s Rosneft to participate in the Arctic project. The investors’ stake in TNK-BP is valued at around $32 billion, but BP can’t buy them out, either with or without Rosneft’s help.

BP has got to hold on to its assets, including its refining and marketing assets, or it risks having to sell off even more upstream assets in the event that either the US liabilities go higher than the company expects or that it is forced to pay several billions to the TNK-BP partners.

But BP investors, who now receive a paltry dividend of $0.07, may not be willing to wait, especially now that the investment banks have put a value on a separation of the upstream and downstream parts of BP.

Paul Ausick

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