From the Telegraph
BP chairman Carl-Henric Svanberg opened the company’s annual general meeting last week with an apology, reminding shareholders that Britain’s second-largest oil major should never forget the explosion which ripped apart the Deepwater Horizon oil rig in the Gulf of Mexico five years ago today.
But those gathered in London’s Excel centre needed little reminding of the staggering financial cost of the disastrous oil spill. BP has burned through the $43bn (£27bn) it set aside to pay for compensation and cleaning up the 3.1m barrels of crude.
Shares in the company are worth a third of their value in 2010 just days before the environmental catastrophe, which killed 11 people. Overnight, BP went from being arguably one of Britain’s most influential and profitable companies into what has been described as a “zombie” business.
To cover its liabilities for Deepwater Horizon, BP has been forced to sell off $38bn worth of assets and return less money to shareholders. Although BP avoided cutting its dividend at the start of the year, it faces an uphill struggle to maintain this strategy as falling oil prices force it to slash investment.
Until it can settle all the claims arising from the Gulf of Mexico spill, BP is likely to remain trapped in a death spiral as it focuses on the short-term priorities of setting aside whatever cash it can for fines and compensation, while desperately trying to defend its dividend.
At a time when its rivals are planning game-changing takeovers such as Royal Dutch Shell’s £47bn deal to buy BG Group, BP’s chairman Mr Svanberg has to tell investors that the board’s priority is “making sure that the company is made safe and secure financially”.
This is likely to remain the priority, at least until the company is handed a final fine under the US Clean Water Act case currently reaching its conclusion in Louisiana. BP faces a potential $14bn fine that would exceed its current provisions. However, the company acknowledges that it could be decades before the final bill is known.
BP is now thought to be vulnerable to a takeover by a larger competitor, with Exxon Mobil – the world’s largest listed oil company by market value – a possible candidate. However, any takeover would have to consider the ongoing cost of the clean-up and ongoing reputational damage caused by the disaster, which are both still impossible fully to quantify. Certainly, most Americans are unlikely to forget the disaster. Although BP claims that the coastline and environment near the spill has recovered well, much bitterness remains towards the company.
“The BP disaster brought tragedy and ruin to the waters, coasts, marine life, and communities of the Gulf, many of which are still suffering the impacts today. We can’t un-dump that oil or undo its damage, but we can do more to make the people whole and ensure it never happens again,” said Peter Lehner, executive director of the Natural Resources Defence Council in America.
However, some analysts argue that, ironically, the Gulf of Mexico disaster has helped to prepare BP for the slump in oil prices which has shaken the industry to its core over the past six months. A 50pc slump in the price of crude has led to widespread cost-cutting and sweeping redundancies across the oil and gas sector.
After years of growing fat from high prices, resources companies are suddenly seeking to shrink by selling non-core assets, reducing headcounts and focusing on their most profitable areas. Arguably, this is a road that BP started to walk down the day after Tony Hayward – who had become a hate figure in the US – stepped down as chief executive to be replaced by the urbane American, Bob Dudley.
Despite the uncertainty surrounding the final bill for the Gulf of Mexico and the impact of $50 oil, Mr Dudley – who has also faced criticism over his own $12m remuneration – didn’t give the impression of a man who is about to throw in the towel.
“BP has faced some big challenges. But we have pulled together as a team. We had a determination and conviction to put right the things that went wrong – and to do the right thing by those who were affected,” said Mr Dudley.
Although analysts expect BP’s net income to fall by 9pc in the first quarter to around $1.53bn, this will be a lower decline than its larger UK rival, Shell, is predicted to register.
“Since the Gulf of Mexico, they have actually done pretty well actively managing the business and making it smaller,” said Jason Gammel, oil equities analyst at broker Jefferies. “BP has probably been the most aggressive in managing the low oil price environment and they have succeeded in selling a lot of assets.”
The company has already said that it would cut expenditure by 20pc this year, while it lays off staff in high-cost operating areas such as the North Sea. It has also frozen pay for the year in a bid to rein in costs, while focusing on its bigger opportunities, such as Iraq.
“The oil price environment makes it very tough right now for all of the operators in the industry, not just BP,” said Mr Gammel.
Analysts are expecting more savings to be announced when the company reports quarterly earnings in a few weeks, with some looking for a figure in excess of $100m to be pruned from its operating costs. These savings are likely to be ploughed back into defending the dividend, which remains among the top- yielding stocks on the FTSE.
“I am expecting some pretty significant cost-cutting to come out of BP on top of what we already know of,” said Mr Gammel, who rates the stock as a buy.