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Why Shares of BP Midstream Partners Rallied Nearly 14% at the Open Today

By Reuben Gregg Brewer – Dec 20, 2021 at 11:42AM

Key Points

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BP Midstream's parent came calling, and a deal has finally been hammered out. Here's a quick look.

What happened

Shares of BP Midstream Partners (BPMP) rose sharply in early trading on Monday, gaining just shy of 14% at one point in the first hour of the day. The news driving this wasn't really a surprise; it was more of a confirmation of what was already known. Here's the background.

So what

BP Midstream Partners was spun off from integrated energy giant BP (BP -0.92%) in late 2017. The initial public offering (IPO) price was $18 per share. The basic goal of the IPO was for BP to raise cash that it could use to shore up its balance sheet and invest in its business. In addition, this move would allow the oil giant to sell (or "drop down" in industry lingo) additional assets to BP Midstream Partners so it could raise even more cash in the future. A number of big energy companies made similar moves. 

A person in protective gear with oil wells in the background.

Image source: Getty Images.

Since that point, however, the energy sector, and particularly midstream master limited partnerships (MLPs), have been under pressure. This fact has reduced the attractiveness of having a controlled MLP. So, in early August, BP announced that it was looking to buy BP Midstream Partners, taking the assets back in-house. The share price at that point was around $13 per share, meaning that BP was buying low after having sold high.

Today's action is related to the news that the agreed-upon price of this deal is 0.575 shares of BP stock. The stock market is falling today, and BP shares are down a few percentage points, but that's conservatively around $14.75 per share for BP Midstream. It's still a pretty good deal for BP, which originally sold the units at $18 apiece. BP, meanwhile, is saying that this move will help to streamline its transition toward a cleaner future.

Now what

If what you want to own is a midstream company, then you should probably sell BP Midstream and buy a new midstream name. There are plenty of options to choose from that offer yields that are solid (though perhaps lower), such as Enterprise Products Partners or Enbridge. If you are happy owning an integrated oil name that's working to shift its business in a cleaner direction, then you can stick around. However, there are probably better options available to you, including Shell and TotalEnergies. In the end, this well-telegraphed deal isn't really so exciting for anyone, except perhaps BP.

Reuben Gregg Brewer owns Enbridge and TotalEnergies. The Motley Fool owns and recommends Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

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