Global Oil Companies Discover Cash in Their Trash

To pay tens of billions of dollars in costs from the Deepwater Horizon disaster and spill, BP (BP) has been forced to ditch oil fields and other energy properties across the globe. Far from the predicted firesale, BP's housecleaning has been a huge success. It has brought in $22 billion so far, fetching double the values on BP's books for some assets. Now other companies including Royal Dutch Shell (RDS.A) and ExxonMobil (XOM), which sold nine of its Gulf of Mexico fields for about $1 billion last year, are also making divestitures of their less-attractive assets.

Asset sales by the world's oil majors exceeded $50 billion last year, the most in at least 12 years. It's not over. Jerry Kepes, a partner at consultants PFC Energy, estimates the oil majors have $150 billion to $200 billion worth of properties on their books that they could sell without an appreciable negative impact on their current performance or long-term outlook. "They are not getting any value in the stock market for having these assets around," he says.

The sales are being prompted by several factors, including an abundance of buyers, stable oil prices that make deals easier, and a continuing shortage of the skilled staff needed to develop and operate oil fields. The most important factor may be a kind of identity crisis the big companies are struggling through. The markets used to reward the majors with higher share prices than their smaller competitors. No longer. Investors today see these companies as unwieldy conglomerates with little potential for growth. "There has been deep skepticism that the supermajor model adds value," says Theepan Jothilingam, an oil analyst at Morgan Stanley (MS) in London.

Over the last five years, stocks of the six largest Western oil companies—ExxonMobil, Shell, BP, Total (TOT), Chevron (CVX), and ConocoPhillips (COP)—have logged an average annual return of just 5 percent. That's considerably less than the 8.3 percent returned by an index of smaller oil companies, including Anadarko Petroleum (APC) and Apache (APA), and downright puny compared with the rocket-propelled performance of some smaller exploration companies such as Africa specialist Tullow Oil, which averaged 38 percent. Crude oil itself was a better investment than the majors, returning 9 percent.

The energy giants are beginning to get the message. They're putting low-growth or marginal businesses on the block to raise money to plow into exploration, liquefied natural gas, and deepwater drilling activities that bring higher risks along with the possibility of better returns. Shell has turned more aggressive under new Chief Executive Peter Voser. The company has already exceeded a target of $8 billion in divestments. Among the highlights: the sale of a 10 percent stake in Australia's Woodside Petroleum for $3.35 billion and a sale of Texas gas fields to Occidental Petroleum (OXY) for $1.8 billion.

Shell needs capital for what may turn out to be as much as $50 billion in new Australian gas projects as well as a huge $19 billion plant in Qatar that converts natural gas to diesel and jet fuel. "The divestments are in areas where we either see limited growth potential or other people may be prepared to invest more," says Chief Financial Officer Simon Henry.

Another big seller is ConocoPhillips, the No. 3 U.S. oil company, whose CEO James J. Mulva announced in 2009 that he wanted "a reduced but more strategic" portfolio. Minority stakes with little control were deemed expendable. Last year, Mulva sold Conoco's 9 percent stake in Syncrude Canada, a tar sands venture, to China Petrochemical for $4.65 billion. The company is also jettisoning its 20 percent stake in Russia's OAO Lukoil for about $9 billion. "I think they've realized they don't need to compete with Chevron and Exxon in terms of size," says Brian Youngberg, an analyst at Edward Jones.

There's been no shortage of buyers. Occidental and Apache, midsized operators skilled at squeezing oil out of old fields, are both believed to have competed for BP's first big sale of mature North American and Egyptian fields. (Occidental declined comment.) Apache prevailed, agreeing in July to pay $7 billion, a rich price. Buyers from energy-hungry developing nations like China have also joined the fray. In November, China's CNOOC (CEO) and Argentina's Bulgheroni family bought BP's 60 percent stake in Pan American Energy for $7 billion. The sale followed the pattern of other BP sales: Pan American was a low-growth property too distant from other BP holdings to offer economies of scale.

Consultant PFC Energy says that none of BP's sales will affect the three big bets the company is making for its future: deepwater drilling in the Gulf of Mexico and Angola; complex gas projects like BP's big plants in Trinidad; and massive oil projects such as in Azerbaijan. When he took over in July, Robert Dudley, BP's new CEO, said that a silver lining of the Gulf of Mexico mess was that BP could wind up a slimmer company with "higher-quality assets and growth." What sounded like happy talk then now seems prescient.

The bottom line: Major global oil companies are unloading low-growth energy assets. They're getting surprisingly rich prices in return.

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