The world's second-largest polypropylene business is up for grabs.
London-based oil giant British Petroleum plc announced April 27 that it plans to sell or spin off the olefins and derivatives (O&D) segment of its petrochemicals unit, which includes PP and high density polyethylene. In a news release, BP Chief Executive John Browne said a divestiture ``is likely to deliver the best returns to our shareholders and to be in the best long-term interests of the [O&D] business itself.''
News of the move comes about a month after Browne said that future investments in petrochemicals would be in areas where BP had ``a technological lead'' - such as PET feedstocks paraxylene and purified terephthalic acid - instead of in O&D, which dominates BP's portfolio in the ``more fragmented and lower-growth'' European markets.
The O&D unit employs 7,500 at 24 sites worldwide. In North America, BP makes PP at plants in Alvin and Deer Park, Texas; and Carson, Calif. BP's North American HDPE works are in Deer Park and Cedar Bayou, Texas. The unit also produces solid and expanded polystyrene, as well as plastics feedstocks propylene, ethylene, butadiene and benzene.
In an April 28 phone interview from London, BP spokesman Robert Wine said the firm will spend the rest of 2004 detaching O&D into a separate company, in preparation for an initial public offering that probably will occur in late 2005. ``That's likely the way it will go, but if someone knocks on our door, we'll surely listen to their offer,'' Wine said.
Petrochemicals was the only one of BP's four operating units that did not show a profit in the first quarter of 2004, instead posting a loss of $25 million. The petrochemicals unit racked up a profit of about $600 million last year, but only about a quarter of that total came from O&D.
No sales estimate was available for the unit, but Wine said O&D consumed between $7 billion and $8 billion of operating capital in 2003, representing more than half of the total for BP's petrochemicals. Wine said the operating capital number is comparable to a business' book value.
Wine added that BP officials see more value in an IPO than in selling the unit's individual parts, adding that the cyclicality of the petrochemicals market served as a driver for BP's decision.
``The trouble is that in the [petrochemical] industry, everybody's been waiting for the next `up,' and it's never quite arrived,'' he said. ``[The unit] has offered good performance compared to others in the industry, but it hasn't produced the results that the rest of BP is looking for.''
BP will retain a stake in the IPO, but the size of that stake hasn't been determined, officials said.
Balaji Singh, president of Chemical Market Resources Inc. consulting firm in Houston, compared BP's decision with similar moves in which oil makers Royal Dutch/Shell Group and DSM NV cut back on their plastics and chemicals holdings.
``Shell had no synergy between any two of its chemical businesses, and DSM's chemical business also wasn't done in a systematic fashion,'' Singh said. ``ExxonMobil is an exception here, because they've been very careful about the way they've done things. They're an oil company, but they've looked at the full petrochemical chain and figured out where the strength is.''
Singh added that he is not surprised that BP would let go of its PP holdings, since much of the firm's PP portfolio came from its 1998 acquisition of American oil firm Amoco Corp.
``There was no history [at BP],'' he said. ``All of the expertise was at Amoco.''