BP raises divis as Glencore/Xstrata deal takes shape

It's all go in the energy sector today: BP has all but recovered from its troubles, while Glencore and Xstrata are a step closer to their $90bn merger.

by Emma Haslett
Last Updated: 20 Nov 2012
Time was that we all thought BP was, if not on the brink of the abyss, then edging gently towards it. But it seems the worst oil spill in US history has done little more than make a temporary dent in the oil giant’s income: this morning, BP announced it’s planning to raise its dividend by 14%, the first increase since the Gulf of Mexico oil spill in 2010. To be fair, though, it’s not out of the hot water quite yet…

The divi is, presumably, a sort of ‘thank you’ to shareholders who have held on through all its ups and downs over the past couple of years. But the good news is that replacement cost profit (the standard measure used by the energy industry, which strips out the effect of oil price movements) for the three months to the end of December was $7.6bn (£4.8bn) – up from $4.6bn over the same period last year. For the whole of 2011, profits were a none-too-shabby $23.9bn, up from a $4.9bn loss in 2010.

There are still one or two problems arising from the spill. To begin with, there’s the upcoming case against contractor Halliburton: BP’s asking it to pay all the costs and damages that arose from the spill. So far, BP has paid out $8.8bn in damages – although, considering it let Cameron International, another company involved in the blowout, off with a £250m settlement, we’d say the chances of recouping that are pretty slim. Still, CEO Bob Dudley is clearly gearing up for a showdown: ‘we are preparing vigorously for a trial,’ he said this morning. Fighting talk.

Elsewhere in the energy industry, Glencore and Xstrata have finalised the terms of their merger deal, which will create a company worth $90bn (to be called Glencore Xstrata International, apparently. It’s a bit wordy – but then again, ‘Xcore’ would give rather an unfortunate impression…). It’s a pretty good deal for Xstrata shareholders: they’ll get 2.8 Glencore shares for every Xstrata one they hold, which gives them a 15.2% premium – that’s a lot more than the amount the trading house originally wanted to pay for the company: ie. nothing.

Of course, nothing like this is ever straightforward. Before Glencore’s flotation last May, Xstrata CEO Mick Davies was unenthusiastic about the idea on the grounds that it would be too difficult to value the trading house. Now they’ve finally agreed, the shareholders are putting up a fight: the deal requires 75% of shareholders to agree – but Standard Life Investments (which, with a 2.15% stake, is one of Xstrata’s largest investors) is already angling for a higher valuation. ‘Although we see some merit in the merger… the proposed exchange ratio clearly undervalues Xstrata’s assets and future earnings contribution,’ it said this morning.

What further complicates things is that Glencore already owns just over a third of Xstrata and is thus unable to vote, which means only 16.4% of shareholders need to vote against the deal to block it. So it’s by no means a done deal quite yet…

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