With its reputation in tatters and costs continuing to escalate, BP plc on Tuesday announced a radical shakeup that will bring in new leadership and lead to divestments to make the company leaner. The expected asset sales, scheduled to be completed over the next 18 months, could result in the loss of 8% of BP's total natural gas and oil production worldwide, which still would put the company ahead of Royal Dutch Shell plc.
The announced overhaul follows the massive Gulf of Mexico (GOM) disaster, which resulted in a $17 billion replacement cost loss for BP in the quarter. After adjusting for all of the GOM-related items and fair value accounting effects, underlying quarterly profits topped $5 billion, which was well ahead of $2.9 billion earned a year ago. Included in the $32.5 billion in quarterly charges was a $20 billion escrow compensation fund set aside for the Gulf Coast.
"The costs and charges involved in meeting our commitments in responding to the Gulf of Mexico oil spill are very significant and this $17 billion reported loss reflects that," said CEO Tony Hayward. "However, outside the Gulf it is very encouraging that BP's global business has delivered another strong underlying performance, which means that the company is in robust shape to meet its responsibilities in dealing with the human tragedy and oil spill in the Gulf of Mexico."
BP took a kitchen sink approach in the latest quarter's results apparently to get as much bad financial news as possible in front of shareholders, who have seen the company's stock price fall 40% since April. The quarterly charge of $32.2 billion reflects the impact of the GOM spill, which includes costs to date of $2.9 billion for the response and a charge of $29.3 billion for future costs, including the funding of the $20 billion escrow fund. Future liability may take years to expense.
To ensure its viability, BP will slim down by selling assets for up to $30 billion over the next 18 months, primarily in the upstream business, and "selected on the basis that they are worth more to other companies than to BP," the company said. "This portfolio high grading will leave the company with a smaller but higher quality exploration and production (E&P) business." The $7 billion in assets BP agreed to sell to Apache Corp. last week are included in the planned sales (see Daily GPI, July 21).
Chairman Carl-Henric Svanberg, who spoke briefly with financial analysts Tuesday during a conference call, stressed that BP would be a stronger and better company, albeit smaller, as a result of the overhaul.
"First, BP will change as a result of this accident," Svanberg said. "We are taking a hard look at ourselves...what we do and how we do it..." The company is "committed to meeting its obligations in the Gulf of Mexico and this set of results underlies our confidence to do so while providing a first estimate of the costs...Clearly the financial impact is very substantial, but our businesses around the world are performing well...
"The charge of $32.2 billion is for costs that need to be covered...It's based on our belief that we will not face gross negligence in this incident." The board is "very focused on the company's financial position...liquidity is strong...and through the sale of assets, today we are extending this divestment program to $25-30 billion..." The assets to be sold are "attractive to others and to us...They will create a stronger performing portfolio...and remove any worry about our financial strength."
Hayward, who has spent his entire career with BP, the last three as CEO, agreed to step down at the end of September (see related story). The changes going forward would "clearly leave BP a changed company," he said. "We need to move forward, particularly in the United States, and to do so under new leadership." Managing Director Bob Dudley, an American, takes over Oct. 1. Dudley joined BP when it bought U.S.-based Amoco.
The GOM tragedy was a "watershed for BP and in the future we will be a different company," said Svanberg. "The challenge requires fresh leadership...robust governance..."
Hayward led most of the conference call flanked by his management team, which included CFO Byron Grote and Dudley. More than once the CEO and his colleagues stressed the importance of U.S. operations and its relationship to BP.
"I believe strongly that meeting our commitments in the Gulf is critical to BP's long-term success," said Dudley. "Certainly taking up this [CEO] role over the coming months will not reduce my commitment to the region."
BP's leadership position in U.S. oil and gas operations is huge. The company remains the largest producer in the GOM, where it has made some of the biggest and deepest oil and gas discoveries to date. BP also is one of the biggest onshore producers and it is the largest natural gas marketer in North America. In 2Q2010 BP's U.S. net liquids production in the quarter was 581,000 b/d. U.S. net natural gas output topped 2.24 Bcf/d.
To manage its balance sheet and financial liquidity to meet all of its future financial obligations, BP plans to take a "prudent approach," Grote told analysts. Net debt levels are expected to fall to a range of $10 billion to $15 billion within the next 18 months, compared to net debt of $23 billion at the end of June. Group capital spending for 2010 and 2011 will be about $18 billion a year, in line with previous forecasts.
"We expect we will pay the substantial majority of the remaining direct spill response costs by the end of the year," said Hayward. "Other costs are likely to be spread over a number of years, including any fines and penalties, longer-term remediation, compensation and litigation costs."
Higher quarterly prices for oil and natural gas compared with 2Q2009 made up for slightly lower output and a loss in gas marketing and trading in E&P, while the Refining & Marketing segment reported increased profits as a result of strong performance in the fuels value chains and the lubricants and petrochemicals businesses. BP's underlying quarterly downstream result was the strongest since 2Q2006, with the U.S. business returning to profitability for the first time in more than a year.
Excluding GOM costs, BP's quarterly operating cash flow jumped 31% from a year ago to $8.9 billion. This higher operating cash flow enabled the group to reduce net debt by $2.9 billion in the first half of this year, despite oil spill payments. In addition, BP lined up additional bank borrowing facilities, all of which remain undrawn, and it has reduced cash outflow in 2010 by reducing capital spending and by canceling dividend payments at least until 2011. The board is to consider future dividend payments when 4Q2010 results are issued in February.
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