U.S. Markets closed

Why the Baupost Group exits its position in BP

Smita Nair

Overview: The Baupost Group’s 2Q14 positions (Part 6 of 6)

(Continued from Part 5)

The Baupost Group exits its position in BP

Seth Klarman’s Baupost Group initiated new positions in eBay Inc. (EBAY), Theravance Biopharma Inc. (TBPH), SunEdison Semiconductor (SEMI), and Kosmos Energy (KOS). It fully exited its stake in BP plc (BP).

The Baupost Group completely exited its stake in British Petroleum (BP). It accounted for 3.68% of the Buapost Group’s 1Q14 portfolio. The position was built on last year. The hedge fund decreased almost half of its stake in the British oil company in the first quarter. The decrease was reported by Market Realist here.

After the deepwater horizon explosion and the company’s oil spill in the Gulf of Mexico in 2010, BP’s stock price saw a decline. Litigation and settlement costs took a toll on BP’s valuation. Since then, the company has sold various assets to cover litigation costs. Settlement of claims are expected to end in 2014.

Following the divestment of $38 billion of assets over the last three years, BP has a focused portfolio with growth potential. BP announced in October of last year that it would divest ~$10 billion of additional assets before the end of 2015. It will use the proceeds for distributions to shareholders, especially share buybacks. In March, 2013 BP announced an $8 billion share buy-back program. As of January 31, 2014, BP had spent ~$6.8 billion for repurchasing shares.

BP recently said divestments, with a cumulative value of $3.4 billion, have now been agreed towards the expected total of $10 billion. It recently sold its Hugoton gas assets in Texas for $390 million. It also announced a quarterly dividend of 9.75 cents per ordinary share—the same level as the previous quarter, but 8.3% higher than last year. In mid-July, BP completed the $8 billion share buyback program introduced after the sale of its interest in TNK-BP.

Profits driven by stake in Rosneft, could see impact from sanctions

BP reported a 34% increase in second quarter profit to $3.6 billion. This was higher than the $2.7 billion reported for the same period in 2013. It was 13% higher than the $3.2 billion result for 1Q14. The results were mainly driven by Russian state oil company Rosneft. BP has a 19.75% stake in Rosneft. BP’s stake in Rosneft contributed $1.02 billion in profit in the second quarter. This was up from a $218 million profit in the same quarter last year.

On Russia and its stake in Rosneft, BP said that, “If further international sanctions are imposed on Rosneft or new sanctions are imposed on Russia or other Russian individuals or entities, this could have a material adverse impact on our relationship with and investment in Rosneft, our business and strategic objectives in Russia and our financial position and results of operations.”

Downstream profit falls 39%

Reported production for the quarter was 2,106 thousand barrels of oil equivalent per day (or mboe/d)—6% lower than 2Q13. Underlying production is adjusted for the impact of the expiry of the Abu Dhabi onshore concession, divestments, and production-sharing agreement effects. It was 3.1% higher. This reflects growth in production from higher-margin areas, mainly driven by strong performance in the Gulf of Mexico.

BP said its Upstream profit growth reflected the benefits of higher production in key regions and higher oil and gas realizations. This was partly offset by the impact of divestments and higher non-cash costs.

The Downstream profit fell by 39% year-over-year (or YoY) to $0.73 billion owing to “a significantly weaker refining environment and a weaker contribution from supply and trading negatively impacting the result.” However, it saw benefits from increasing heavy crude runs at the Whiting refinery.

BP expects lower reported production in 3Q14

BP said reported production in the third quarter is expected to be lower due primarily to turnaround and seasonal maintenance activities in Alaska and the Gulf of Mexico. Five new major upstream projects in BP’s key regions have started production in 2014 like the CLOV project in Angola. It achieved first oil on June 12. Three of these five projects are in the deepwater area of the Gulf of Mexico. Two more projects are expected to be on-stream in 2014.

In exploration, BP said it has participated in ten completed wells, so far, in 2014. The wells have resulted in two significant discoveries—Notus in Egypt and Orca in Angola. The company added that 15–17 wells are expected to be completed over the whole year.

Browse this series on Market Realist: