BP looks to divest Castrol lubricants business for up to $10 billion

BP has officially commenced the process of selling its Castrol lubricants business, with expectations to fetch between $8 billion and $10 billion. Reliance Industries and leading private equity firms such as Apollo Global Management and Lone Star Funds have reportedly shown interest in the deal. This follows earlier indications that Saudi Aramco, the world’s largest oil company, was eyeing a potential acquisition of Castrol.

The sale is part of BP’s broader strategy to divest $20 billion of assets by 2027, as the company aims to reduce its debt burden and reposition its operations. BP, one of the most indebted oil majors, has faced pressure from activist investors, including Elliott Management, to improve its performance and balance sheet. The company intends to scale down its net debt to between $14 billion and $18 billion by 2027, compared to nearly $27 billion at the end of this year’s first quarter.

Castrol, a renowned name in the lubricants market, was acquired by BP in 2000 for £3 billion and has since established operations in 150 countries. Despite its iconic status and steady performance, market analysts like Giacomo Romeo from Jefferies believe Castrol’s valuation is below the most optimistic expectations of $12 billion to $13 billion. According to Romeo, economic uncertainties may force BP to accept a lower valuation or delay the divestment process.

The sale of Castrol aligns with BP’s decision, under CEO Murray Auchincloss, to pivot back towards its core oil and gas business while scaling back on previously ambitious green energy targets. Castrol is considered less integrated within BP’s existing refining and marketing operations, which makes it a natural candidate for divestment. Auchincloss had earlier remarked on strong inbound interest in Castrol from potential buyers.

This latest move highlights BP’s attempt to reset its strategy amidst a changing energy landscape. Apart from Castrol, BP is also reportedly looking to offload stakes in Lightsource BP solar business, its Gelsenkirchen refinery in Germany, and its US onshore wind energy assets. Proceeds from these sales are to be utilised exclusively for debt reduction.

The sales process is being handled by Goldman Sachs, as reports confirm that preliminary marketing materials have already been distributed to interested buyers. The prospective purchase list includes major private equity names such as Brookfield Asset Management and Stonepeak Partners. Saudi Aramco may also consolidate Castrol with the Valvoline lubricants business it acquired in 2023, enhancing its portfolio in the downstream segment. However, no formal comments have been issued by the interested parties at the time of writing.

The performance of BP shares remained steady despite the news, closing flat at 358p. While uncertainties remain over achieving optimal valuation for Castrol, industry players recognise its enduring appeal from a market perspective.