Trolling for Cash, BP Files for Pipeline IPO

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BP Midstream Partners L.P. filed a Form S-1 with the U.S. Securities and Exchange Commission (SEC) on Monday for an initial public offering (IPO) of limited partnership common units valued at $100 million. The company is being spun out of BP Pipelines (North America) Inc., an indirect wholly owned subsidiary of BP PLC (NYSE: BP). The new company has applied for a listing on the New York Stock Exchange under the ticker symbol BPMP.

The new master limited partnership (MLP) includes BP midstream assets in the United States comprised of about 4,630 miles of crude oil, refined products, diluent and natural gas pipeline systems that currently transport approximately 2.1 million barrels of oil equivalent to refineries, refined products terminals, connecting pipelines and natural gas processing plants. The prospectus also notes that BP has substantial midstream assets around the world “that may be candidates for contribution to [BP Midstream Partners] in the future ….”

The filing did not specify the number of common units to be included in the IPO nor the price per unit. BP Midstream Partners Holdings LLC, a direct, wholly owned subsidiary of BP Pipelines, will own the general partner interest and a portion of the limited partnership interests in the new MLP.

This spin-off is intended to generate some sorely needed cash for BP. At the end of the second quarter the company reported cash and equivalents of $23.3 billion, a sizable war chest to be sure. Operating cash flow of $6.9 billion did not include amounts related to the 2010 Gulf of Mexico oil spill. Including that, operating cash flow totaled $4.9 billion.

BP plans to spend $15 billion to $17 billion on capital projects this year and expects to divest $4.5 billion to $5.5 billion in assets. In the first half of the year, divestitures totaled just $700 million. BP also expects to pay $4.5 billion to $5.5 billion for the 2010 oil spill this year.

Selling midstream assets has not been easy. BP failed to reach a deal with Enbridge last year for a portion of BP’s Gulf of Mexico offshore system. Midstream partnerships have, in fact, had a tough year so far with the Alerian MLP Index down about 11.6% for the year to date, compared to a gain of more than 10% in the S&P 500.

Despite its challenges, BP continues to pay a dividend yield of around 6.7%, a level that some analysts believe is unsustainable. Hiving off the midstream business helps in two ways: pulling in a nice chunk of cash at the IPO and reducing BP’s dividend yield while still maintaining a substantial portion of the midstream business’ cash flow.