Posted on 27 Jul 2010
In the wake of a $17.15 billion second-quarter loss due to the Gulf of Mexico oil spill, BP PLC on Tuesday launched a radical shakeup, including plans to sell about $30 billion in assets, appoint a new chief executive and alter the way it does business.
The changes will leave the company smaller and focused on restoring its battered reputation, though it will continue to pursue opportunities in deep water and plans to remain as a strong presence in the U.S., senior BP executives said.
Chief Executive Tony Hayward, who will be succeeded by Robert Dudley on Oct. 1, said the planned asset sales would turn BP from a 4 million-barrel-a-day oil giant to "perhaps a 3.5 million-barrel-a-day company that has higher-quality assets [and] a more focused portfolio." It would still produce more oil and gas than rival Royal Dutch Shell PLC.
Some analysts said the disposals were a chance for BP to reinvent itself. "In the space of 18 months they could end up becoming a more finely-tuned, leaner, meaner machine," said Jason Kenney, an oil analyst at ING Bank. He said it provided the company with a "unique chance" to get ahead of its peer group by focusing more tightly on the top-performing assets in its portfolio.
BP said Mr. Hayward was to step down by "mutual agreement" with the company's board. The CEO admitted that by leading BP's emergency response to the Deepwater Horizon disaster he had become the "public face" of BP and as a consequence had been "demonized and vilified" in the U.S. "The fact is that BP cannot move on as a company in the United States with me as its leader," he said.
In a statement, BP Chairman Carl-Henric Svanberg said the oil spill had been a "watershed incident" for the oil major, and that it would be a "different company going forward, requiring fresh leadership supported by robust governance and a very engaged board."
"The triple-pronged approach of increased provisions, asset sales and a new CEO should be a potent mix in forming a strong future foundation," said Richard Hunter, head of U.K. equities at Hargreaves Lansdown Stockbrokers.
BP posted a loss of $17.15 billion for the second quarter stemming from a pre-tax charge of $32.2 billion to cover future and current costs from containment, cleanup, compensation and fines relating to the Gulf of Mexico oil spill. BP expects to receive a tax credit of $9.88 billion on the charge, bringing the post-tax spill cost to $21.95 billion.
BP Chief Executive Tony Hayward will leave his post and has been nominated for a role in Russia. Video courtesy of Sky News.
BP's partners in the Macondo well—Anadarko Corp. and Mistui & Co., who hold a combined 35% stake—have so far refused to pay their share of spill costs, claiming BP was negligent. BP will pursue the companies for their share of the costs through all legal means available, said Mr. Hayward.
Although BP has booked the loss now, cash payments toward spill costs, notably into the $20 billion compensation fund, will be spread over several years.
Still, not all analysts were convinced that BP had fully covered potential costs. Credit Suisse said that if the flow rate were higher than BP's estimate and the company were found to be negligent it could face an additional $12.6 billion in charges. "As the various investigations on the causes of the accident progress, we see risks that BP may take further provisions in following quarters," Credit Suisse said in a research note.
To prepare its balance sheet, BP said it will sell $30 billion—about a tenth of the company by some estimates—of exploration and production assets over the next 18 months. It will also lower its current debt level to between $10 billion and $15 billion, compared with net debt of $23 billion at the end of June.
BP has already agreed to sell a package of assets in North America and Egypt worth $7 billion to Apache Corp. The company is also in talks to sell its stake in Argentine unit Pan American Energy to Bridas Corp. for around $9 billion, according to a person familiar with the matter.
Some of BP's substantial assets in Alaska are also being offered to a number of potential buyers, said another person. BP has confirmed it will sell its natural-gas assets in Pakistan and Vietnam.
"The company's asset value is substantially above its current share price," so divestments are a logical way to raise cash, said Colin Morton, a fund manager at Rensburg Fund Management, which has a stake in BP. "This could be quite a good catalyst for them."
Depending on which assets it sells, BP could be quite a different investment proposition at the end of the process. "You might start to see [BP] appear in other portfolios if people start to see it as a growth story," rather than the income stock it was previously, Mr. Morton said.
Aside from the spill, BP said it is performing well. Its clean replacement cost of supplies, a keenly-watched figure that strips out gains or losses from inventories and exceptional items such as the spill costs, rose almost 70% in the second quarter to $4.98 billion, from $2.94 billion a year earlier. Second-quarter operating cash flow was $8.9 billion, far in excess of the almost $3 billion in oil-spill costs it paid out in the quarter.
"The company is in robust shape to meet its responsibilities," said Mr. Hayward. BP will consider whether to resume its dividend payments in February next year, said Mr. Svanberg.