FT Schools - BP's divestment
IB syllabus links
| Syllabus unit | Key ideas for discussion |
|---|---|
| 1.5 Growth and evolution |
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| 3.2 Sources of finance |
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| 3.3 Costs and revenues |
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| 3.4 Final accounts |
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| 3.6 Efficiency ratio analysis (HL) |
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| 3.7 Cash flow |
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| 3.9 Budgets (HL) |
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| Concepts |
Introduction
BP has sold 65% of its Castrol lubricants business for $6 billion. This divestment helps BP reduce debt, improve liquidity and cash flow, and refocus on its core activities. The decision also supports BP’s wider strategy to cut costs, lower financial risk, and become a simpler, more profitable business.
The article and exam questions can be found on the FT Schools website here.
Case Study
BP is a multinational company operating in over 70 countries. In response to investor pressure and rising debts, the energy company has agreed to sell 65% of its Castrol lubricants business to the US investment firm Stonepeak. The deal values Castrol, a thriving business, at $10.1 billion and will provide BP with approximately $6 billion in cash.
BP plans to use all of this money to repay debts, which currently stands at $26.1 billion and is classified as a non-current liability. Reducing debt is expected to improve BP’s liquidity position and lower the risk of a liquidity crisis.
Instead of selling Castrol entirely, BP will retain a 35% ownership stake, meaning Castrol will operate as a joint venture (JV). BP will receive around $800 million in future dividends from the JV, although it does not expect further payments in the short to medium term. BP may sell its remaining stake after a two-year lock-up period.
This divestment forms part of BP’s wider strategy to raise $20 billion through asset sales by 2027, following criticism of its earlier strategy to expand rapidly into renewable energy. BP has recently changed its senior leadership team and aims to become a simpler, leaner, and more profitable organization.
Exam Practice Questions
| (a) | Define the term non-current liability. | [2 marks] |
| (b) | Outline why BP may want to reduce the risk of a liquidity crisis. | [2 marks] |
| (c) | Explain one benefit to BP of selling 65% of Castrol rather than selling 100%. | [2 marks] |
| (d) | Explain two ways in which selling part of Castrol could improve BP’s liquidity. | [4 marks] |
Answers
(a) Define the term non-current liability. [2 marks]
A non-current liability is a debt or financial obligation that is due to be repaid after more than one year from the balance sheet date, such as long-term borrowings.
Award [1] for a definition that shows limited understanding of non-current liability.
Award [1] for a definition that shows clear and accurate understanding of non-current liability, similar to the example above.
(b) Outline why BP may want to reduce the risk of a liquidity crisis. [2 marks]
A liquidity crisis occurs when a business cannot meet its short-term obligations. By reducing this risk, BP can ensure it has enough cash to pay suppliers, employees, and interest on existing loans, helping it continue operations without disruption and maintain stakeholder confidence.
Alternative responses could link to investor confidence, credit ratings, or borrowing costs.
Award [1] for an outline that shows limited understanding of the demands of the question.
Award [2] for an outline that shows good understanding of the demands of the question, similar to the example above.
(c) Explain one benefit to BP of selling 65% of Castrol rather than selling 100%. [2 marks]
Possible answers include an explanation of any one of the following:
- BP receives cash worth $6bn immediately, thereby improving its cash flow and liquidity, yet without having to sell its entire stake in a thriving business (Castrol).
- Retaining 35% allows BP to receive future dividends ($800m expected).
- Risk is shared with Stonepeak, thereby reducing BP's exposure.
- BP keeps some strategic influence and can continue to benefit if Castrol grows in value.
- BP still has the option to sell its remaining stake in Castrol later, which gives it strategic flexibility.
Award [1] for an appropriate benefit, and a further [1] for a clear explanation written in the context of the case study.
(d). Explain two ways in which selling part of Castrol could improve BP’s liquidity. [4 marks]
Possible answers include an explanation of any two of the following:
- The $6bn cash inflow increases BP’s cash balance, improving its ability to meet short-term debt obligations, i.e., current liabilities.
- Using the proceeds to repay debt reduces interest payments on debts in excess of £21bn, improving net cash flow in the short and long run.
- Lower debt reduces pressure on BP's working capital, decreasing the risk of a major liquidity crisis.
- Lower debt and gearing improves investor confidence in BP, which is essential for its long term growth and strive to be a "simpler, leaner, and more profitable organization.”
Mark as a 2 + 2.
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Paul Hoang
FT Schools teacher advisor for IB Business Management