BP sells strategic oil storage assets to Magellan

By Joshua Schneyer

NEW YORK (BestGrowthStock) – BP Plc said on Tuesday it sold its Cushing, Oklahoma, oil tanks, a major tool of its renowned trading arm, in its first asset sale since the Macondo well blowout saddled it with multibillion-dollar liabilities.

The oil major will lease back the 7.8 million barrels of tank storage space at Cushing for several years from Magellan Midstream Partners LP, which acquired the tanks as part of a larger $339 million transaction, including some of BP’s existing oil inventories.

Cushing is the delivery point for the West Texas Intermediate (WTI) crude oil futures contract, the benchmark oil price in the Americas, and storage levels in the tanks there can have a major influence over the price of oil.

The transaction, which comes after BP first put the assets up for sale in February, is not part of BP’s plan to unload $10 billion in noncore upstream assets to help pay for the cost of the Macondo cleanup, BP spokeswoman Sheila Williams said.

BP has already set aside $20 billion to pay for spill-related liabilities, and has so far spent more than $3 billion on clean-up and claims since its Gulf of Mexico spill began in April.

BP has long been known as an aggressive oil trader, and industry experts say it has leveraged its space at Cushing for its trading advantage.

The British oil giant is the No. 3 holder of storage space at Cushing, after Enbridge and Plains LP.

Oil majors have sold off Cushing storage capacity in recent years and much is now owned by pipeline companies that lease space to commodities trading firms and occasionally to Wall Street banks.

Traders said they did not expect the sale to result in a major shift in BP’s trading activity.

“The business at Cushing has changed. A decade ago the game was delivering foreign crude there if WTI got strong so you needed your own tanks. Now it’s all about storing barrels when WTI is weak and for that you can lease tanks,” said a crude oil trader at a major U.S. oil refiner.

MAGELLAN EYES CANADA

Cushing tankage used to regulate the gap between U.S. and international oil prices by allowing foreign crude to be delivered against the WTI contract when U.S. oil demand was high, but rising Canadian crude exports have all but ended the arbitrage trade.

Instead, companies with access to the huge tank facilities at Cushing have reaped big profits by storing crude and committing it for sale later.

The Cushing tank farm held 35.8 million barrels of crude in the week through July 2, according to data from the U.S. Energy Information Administration, or enough to supply U.S. oil demand for nearly two full days.

Once BP’s lease on the storage space expires, Magellan will be free to rent tanks to other parties.

The 57 tanks BP sold have a shell capacity of 7.8 million barrels but operational constraints currently restrict usable capacity to 5.5 million barrels, Magellan spokesman Bruce Heine said.

The Cushing deal will help Magellan, a firm largely focused on refined products logistics, build up its crude business.

The company is eyeing opportunities from rising Canadian oil production and expects to eventually play a role in supplying Houston-area refineries with Canadian crude.

It also plans to build another 2 million barrels of storage at Cushing by 2011.

Tulsa, Oklahoma-based Magellan, a master limited partnership, expects the purchase, which also includes a BP crude oil pipeline in the Houston area and the oil major’s refined products pipeline system in east Texas, to immediately add to its distributable cash flow.

In a release, Magellan also said Tuesday it will publicly offer 5 million new common shares, to help repay borrowings and pay for its BP acquisition.

The Magellan purchase, whose total price is $339 million including $50 million in inventories, shouldn’t affect Magellan’s credit rating, according to a statement on Tuesday from Moody’s, which rates the firm’s senior unsecured debt at Baa2.

BP’s U.S.-listed shares, which have lost about half their value since the April blowout of Macondo, closed up 0.33 percent at $36.88.

Magellan units were down about 3 percent at $46.65 after the bell. They had closed at $48.24 on the New York Stock Exchange.

(Additional reporting by Thyagaraju Adinarayan in Bangalore, Matthew Daily in New York and Eric Onstad in London; Writing by Robert Campbell; Editing by Lisa Shumaker)

BP sells strategic oil storage assets to Magellan