BP has agreed to sell its petrochemicals business to Ineos for $5bn, as chief executive Bernard Looney accelerates his efforts to sharpen the focus and strengthen the finances of the global energy company.
The coronavirus pandemic has rocked the energy sector, driving oil demand and prices lower. BP’s first-quarter earnings tumbled 66 per cent while its debt levels, among the highest in the sector, grew.
The crash has emboldened Mr Looney, who took over as CEO in February, to speed up a plan to “reinvent” BP by overhauling its structure and assets in a bid to turn the group into a net-zero emissions company as the world shifts to greener energy.
Ineos, controlled by Jim Ratcliffe, one of the UK’s richest men, will pay a deposit of $400m and a further $3.6bn when the deal is expected to complete by the end of this year, BP said in a statement on Monday.
One of the biggest suppliers of the basic building blocks for everyday products such as plastics, paint and medicines, Ineos will pay an additional $1bn in instalments by mid-2021.
The purchase returns Ineos to its roots in 1998, when Sir Jim, estimated to be worth £12.5bn by the Sunday Times rich list, founded the group in order to buy out a former BP petrochemicals business in Belgium.
“It would take considerable capital for us to grow these businesses,” said Mr Looney. “As we work to build a more focused, more integrated BP, we have other opportunities that are more aligned with our future direction.”
BP shares rose nearly 3 per cent in London trading.
Oil companies have expanded heavily into petrochemicals in recent years, confident that the industry — boosted by the world’s growing middle classes — would provide a source of oil demand even as consumption elsewhere slows.
But BP has a far smaller footprint in this business compared with rivals such as Royal Dutch Shell. The gap widened further in 2005 following the $9bn sale of Innovene, a subsidiary that made up the majority of BP’s chemicals assets, to Ineos.
Under the deal announced on Monday, BP is offloading its remaining aromatics and acetyls operations, which produce petrochemical products including the feedstock used to manufacture polyester plastics. These entities employ 1,700 people across 14 facilities around the world.
The sale will mark BP’s departure from chemicals just as rivals see it as a lower-carbon alternative to sustain their companies through the energy transition.
To reduce its debt levels that are among the highest in the sector, BP had committed to sell $15bn in assets, which the Ineos sale completes. BP has also pledged to cut capital spending by $3bn, secured new credit lines, tapped the bond market for billions of dollars and has said it will “review” its dividend distributions every quarter.
The $5bn price tag for the chemicals assets is a premium to the $3.5bn BP valued them at in December 2019. Ineos said the assets would give the group a strong foothold in two areas where it was not well represented and significantly boost its presence in Asia.
The acquisition takes Ineos into aromatics for polyester — a central ingredient in fibres, film and packaging that are used in items like drinks bottles and ovenproof trays. Acetyls are in products ranging from food to adhesives.
“It’s two big pieces of chemistry in that portfolio that we didn’t have before. It completes the set,” said Tom Crotty, director at Ineos. Most of the $5bn purchase price would be funded through debt, Mr Crotty added.
The privately owned group has expanded aggressively through buying up unwanted assets such as refineries and North Sea oilfields to become an industrial conglomerate with annual turnover of about $60bn.
Mr Ratcliffe’s passion for sports has seen Ineos buy two football clubs and become the sponsor of the British professional cycling team, giving a once obscure industrial name a brand with wider resonance.
While chemicals and refining divisions helped oil companies weather prior downturns, in this recession these businesses have taken a hit as the global economy stalled amid government lockdowns and travel bans.
The profitability of the chemicals industry was under pressure even before the Covid-19 pandemic, particularly for certain grades of plastics where massive investments have resulted in oversupply.
The sector is also facing growing public awareness of marine pollution with chemicals companies facing criticism for producing the polymers that go into single-use plastic items and throwaway packaging.