BP unveiled a survival plan this week that would leave the company smaller and focused on restoring its battered reputation in the aftermath of the Macondo disaster in the Gulf of Mexico. Gone is the blundering Tony Hayward, replaced by American and Gulf Coast native Bob Dudley as chief executive. Chairman Carl-Henric Svanberg could be next on the chopping block. But it may not matter who is at the helm for BP as it attempts an exceptional corporate rebirth, starting with roughly $30 billion in asset sales over the next year and a half. While the company's vision is now clearer after the shakeup, its fate could be determined by forces beyond its control -- courts, politicians and shareholders will all have a big say in BP's future.
BP appears to recognize that it may not fully be master of its own destiny. "We're going to run the company with more financial prudence given the unknown nature of some of the obligations that we might face," Hayward said Tuesday, presiding over his last quarterly presentation to analysts. "While the $32.2 billion charge included in the second-quarter results covers all estimable liabilities, there are some potential liabilities that the company cannot estimate."
That is an understatement on a number of levels. For instance, BP's estimate assumes a US criminal investigation ultimately finds Macondo to be an accident and not an act of gross negligence, which would ratchet up the company's liabilities substantially -- possibly to $60 billion (EC Jul.2,p3). BP also presumes it will be able to execute its corporate transformation without obstruction from authorities in the US, home to $64 billion of its $206 billion in worldwide upstream assets (see table). The US government has far-reaching powers to penalize BP for its safety gaffes. The Obama administration can suspend any lease for up to five years if there is a threat of serious or irreparable harm to life, including ecosystems. It could also refuse to approve permits for drilling, effectively blocking development without suspending or canceling leases. Meanwhile, the US Congress is considering legislation specifically aimed at preventing unsafe operators like BP from obtaining future leases in the Gulf of Mexico.
"There are so many questions about BP's future in the US. Will they be able to keep the Gulf leases? Will they be able to get new ones? BP will have to show measurable progress on safety and can't afford any slip-up because they will be under a microscope," says Oppenheimer & Co. analyst Fadel Gheit. Incoming CEO Dudley said there has been "a lot of political rhetoric in the US" about BP, but that the company had no plans to exit the market. "If we continue with the extraordinary response to the spill, meet our commitments and cooperate with the probe, I think we have a lot to offer to the US oil and gas industry," Dudley said Tuesday, in comments suggesting that BP's importance to US energy security as the country's biggest oil and gas producer could help. BP quietly closed a large deal to buy Gulf of Mexico assets from Devon Energy during the second quarter, suggesting the White House may not seek to blacklist the company. Even so, BP's upstream costs may rise disproportionately compared to its rivals' given its heavy exposure to the deepwater, where tighter regulations are expected around the world.
Losing Patience?
But the key factor to watch is BP's share price. The company's image remake and plan to sell around $30 billion of assets -- mostly "lower-quality" oil and gas fields -- won't happen in a flash, and shareholders could lose patience if the stock scuffles around its recent levels of about £4 in London and $38 in New York. This week's announcements failed to add any buoyancy. If the share price remains in the doldrums, investors could push for a more radical restructuring of the company, such as spinning off downstream operations or breaking up the business entirely. Despite rallying from a 14-year low in late June, BP is still worth nearly $70 billion less than before the Apr. 20 Macondo blowout, and its price-to-earnings valuation based on analysts' forecasts for 2011 profits sits below 6, compared with 9 for Exxon Mobil and 8 for Royal Dutch Shell. BP's recent market cap of around $120 billion is some $130 billion below the enterprise value of its assets -- potentially encouraging sharks to circle.
BP must convince its shell-shocked shareholders that it can return value, either through dividends or growth. The latter could prove difficult since the company will be shrinking for the next year and a half. Investors are already clamoring for restoration of the dividend, which was suspended under pressure from the White House, but BP says it won't re-examine the issue until next February. BP says the assets it plans to divest will be more valuable to their buyers than to BP, which is "resetting" its portfolio with a "smaller but higher quality" upstream business. But who's to say that what's left of BP won't be more attractive in the portfolio of a more reputable rival like Exxon or Shell? "Mr. Dudley will have to fight to preserve BP's independence from several potential predators, most notably Exxon," says Neil Atkinson, head of energy research at Datamonitor (EC Jul.16,p2). "He is entering the CEO's office at the worst point in BP's history and he has an unenviable task."
That task is not impossible, as Exxon proved when it committed itself to safety and emerged stronger after the Exxon Valdez spill in 1989 -- but BP will have to hope that outside forces cooperate with its vision.
Paul Merolli, Washington
End-2009. Source: Simmons & Co.
