BofA warns BP faces downside despite $6 bln Castrol proceeds

Investing.com -- BP said last week it has agreed to sell a 65% stake in its Castrol lubricants business to infrastructure investor Stonepeak at an enterprise value of $10 billion, as the energy major steps up asset sales to reduce debt.

The transaction will generate around $6 billion in net proceeds for BP, including roughly $0.8 billion from the prepayment of future dividend income tied to the remaining stake, with the company saying all of the cash will be used to pay down net debt.

Bank of America analyst Christopher Kuplent warned that despite the headline cash inflow, the disposal leaves BP facing more than 10% downside to the company’s share price.

“BP’s agreement to sell 65% of Castrol leaves >10% downside to our unchanged PO of 375p (ADR $30) – with Castrol’s implied $10bn enterprise value close to our net present value (NPV). However, we see the sale as dilutive to BP’s underlying cash flow quantity and quality,” he wrote.

The bank cut its 2027 and onward earnings per share estimates by about 5% and sees BP’s breakeven oil price up by roughly $3/bbl.

Kuplent said that a year into BP’s $20 billion disposal program, more than $4 billion of proceeds should be received by the end of 2025, with a further roughly $6 billion expected by end-2026, yet adjusted gearing is still seen near 40%.

The analyst warned that selling assets at around 10% free cash flow yields could lift BP’s breakeven oil price by about $10 per barrel, diluting free cash flow by more than 5% and reducing the quality of remaining cash flows as long-life assets are sold.

Separately, RBC Capital Markets analyst Biraj Borkhataria struck a more balanced tone but also questioned the longer-term implications of the deal.

While noting that investors had been looking for a Castrol sale as a catalyst to accelerate deleveraging, the analyst said he “continues to question the rationale of selling this highly cash generative, low volatility and low capital intensity asset.”

“Ultimately this is detrimental to the long term dividend sustainability and earnings quality of the business,” Borkhataria continued. Accelerated dividends now will help reduce debt, but clearly at the expense of medium term cash flows.”

“We think the better long term option would have been to cut the buyback as it has been funded by the balance sheet,” Borkhataria added.

Following completion, which BP expects by the end of 2026 subject to regulatory approvals, Castrol will operate as a new joint venture between BP and Stonepeak.

BP will retain a 35% interest but said it does not expect to recognise earnings or receive dividends in the short to medium term, as the deal structure gives Stonepeak preference on distributions.

The sale lifts the value of BP’s announced or completed divestments to about $11 billion, just over halfway toward the $20 billion target set under its strategy update earlier this year.

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