Along with one of the biggest write-downs in British corporate history, BP announced on Tuesday 27 July 2010, that its Chief Executive Officer, Tony Hayward, is to step down on 01 October. He will be replaced as CEO by Executive Director and the company's current head of US operations, Robert Dudley.
Using an accounting system that removes the gains and losses from changes in fuel inventories, BP announced a replacement cost profit of $4.98 billion for the second quarter, much in line with market expectations. It also saw a significant increase over the same period in 2009, of 31 percent in its operating cash flow to $8.9 billion. However, these encouraging figures were nowhere near sufficient to parry the $32.2 billion (£20.7 billion) charge against the accounts for the costs, current and anticipated, of the Macondo well leak, the subsequent pollution in the Gulf of Mexico and paying compensation to its victims. This leaves BP with a staggering $16.97 billion after tax loss on its balance sheet for the second quarter.
To largely offset these Gulf spillage and clean-up costs, the company plans to sell $30 billion (£19 billion) of assets over the next 18 months and to bring down its net debt over the same term to between $10 billion and $15 billion, a substantial reduction from the $23 billion at the end of 2009. Additionally, to further strengthen its balance sheet, the company intends reducing capital expenditure by $2 billion in 2010-2011 to $18 billion and will pay no dividends until next year at the earliest.
During the past month, BP has already announced that it was in talks with Apache Corporation of Houston, Texas, to sell $10 - $12 billion of oil rights it currently owns in Alaska. Although not one of the "majors", both companies appear to have a good working relationship as in 2003, BP sold to Apache its North Sea Forties Field, the largest ever discovered in the UK sector. In 2006, the Texas company bought a considerable share of BP's Gulf of Mexico Shelf sites.
It should come as no surprise therefore, that on 20 July 2010, BP confirmed the sale to Apache of major assets it owns in Texas, New Mexico, Western Canada and Egypt for $7 billion in an all cash transaction with $5 billion up-front by 30 July 2010.
The markets appear to have reacted nervously to the well publicised discussions between the two companies prior to the deal becoming official as Apache's share price dropped from $98 in mid-June to a low of $83 a month later. This had recovered after the announcement to $94.40 by noon (EDT) on 27 July, maybe on the strength of Apache's announcement that it will not need a $5 billion bridge loan it had arranged and assuring the NYSE that the deal "...plays to Apache's core competence of adding value to underworked assets."
If the Alaska deal goes through as planned, Apache's assets will increase over its 2009 figure by more than 60 percent with its BP purchases alone, to over $45 billion. Alaska looks like new ground for the company but it is well established in all other zones of the purchase including Egypt, where it has been operating since 1996.
BP by decreasing its debt levels, reducing capital expenditure in the near future and selling assets not of primary importance, should meet with the approval of the markets and restore confidence in the company's long-term well-being. John Lynch of Wells Fargo Funds told Bloomberg's Carol Massar on 27 July 2010, that with assets of $250 billion it was a good move by BP to sell 12 percent ($30 billion) in areas where the company was a marginal player and expected BP to maintain its core asset bases like the USA (26 percent of company reserves) and Russia (34 percent).
Carl-Henric Svanberg, BP's Chairman told Bloomberg's Ryan Chilcote that BP fully intended to remain in the USA at its current level of business. He went on to tell the reporter that he thought BP was very near to killing the well and now that the oil had stopped leaking, the company was concentrating on the cleaning up of the waters and beaches of the Gulf of Mexico. As to the compensation claims he said that Ken Feinberg had been appointed as adjudicator to handle it and that "...this could take many years to go through and to compensate all those that have legitimate claims" - not for certain what American politicians want to hear. BP also have no way of knowing for sure if $32 billion was enough, Mr Svanberg said, it was their "best estimate" of the costs.
BP which could face fines of up to $4,000 per barrel spilt if found grossly negligent and $1,000 if simply negligence is proved, is confident that the company will be found innocent of gross negligence, nor found to be the sole responsible party, a relief surely to shareholders and British pensions alike. When challenged by Mr Chilcote to explain why he felt so sure, Mr Svanberg replied that he "would encourage everyone to go and look at the Marine Board's Investigations because they publish witnesses and they publish statements, and if you go in there, I think you would soon come to the same conclusion as the Board has."
The King is dead! Long live the King! Taking over from Tony Hayward is an American from Mississippi, Robert Dudley. As well as being an Executive Director, Mr Dudley was appointed head of BP's Gulf Coast Restoration Organisation once Tony Hayward had been branded "the most hated and clueless man in America" following his seven and a half hour Hearing in front of a Senate committee on 17 June 2010.
It is a little ironic that prior to Mr Dudley's return to America in 2008, he ran TNK-BP, BP's joint Russian oil venture and a somewhat similar position is now going to be proposed by the company for Tony Hayward after he steps down on 01 October 2010.
Carl-Henric Svanberg ranks Mr Dudley very highly, a man "who has spent his working life in the oil industry both in the US and overseas and has proved himself a robust operative in the toughest circumstances." That last attribute no doubt referring to his handling of matters in Russia and a view shared by Andy Lipow of Lipow Oil Associates who told Matt Miller of Bloomberg, speaking in Houston on 26 July 2010, that the Hayward-Dudley reversal made a lot of sense.
Robert Dudley will effectively start with a clean sheet, he told Bloomberg, and have a grace period of several months. He will be in charge of 25 percent of BP's assets and 50 percent of its refining capacity. Mr Lipow went on to say: "Dudley has no gaffes on a public relations basis, comes from the Gulf Coast and will give some breathing room with the Government and Congress".
At this point in the interview, Carol Massar in New York interjected: "Why would BP want to hold on to Tony Hayward?" Mr Lipow replied that Tony Hayward has a really good relationship with the Russians and [knows] TNK's products, including the 1.5 million barrels of oil per day TNK produces of which BP owns half.
The questioning of the competence of Tony Hayward in the USA, by those outside the oil industry I hasten to add, comes through time and again when the media question BP. It is a negative perception that only came about after BP failed to cap the Macondo well at the end of May 2010 and as the Financial Times noted in their 03/04 July 2010 feature on the tragedy: "The devastating blow to BP comes because of the way the disaster has pitted the company against the US government and the American people. The story of the spill is how the fury of a nation was turned on a single company."
I think much of that has to do with the way President Obama appeared to personalise the matter, vilify a man who was conscientiously doing his utmost and who could have left the situation to the head of American operations, and a President who exceeded his legal authority, behaving sometimes like a dictator. Tony Hayward's parents were negligent in not sending him to a Swiss finishing school.
Tony Hayward speaking at BP's press conference said: "Today is a very sad day for me. As many of you are aware, I've spent my entire working career at BP. I love the company and everything it stands for. I thought long and hard over the last month or so about what is the right course of action to take. It is clear that this tragedy will leave BP a changed company and that to move forward, particularly in the United States, it should do so under new leadership."
Mr Svanberg finished his Bloomberg interview by saying of Tony Hayward: "Remember that he is a tremendously experienced and capable leader that has all this history in the oil industry; so he'll have tremendous value." An accurate endorsement I'm sure of a guy dealt a pretty bad hand. Mind you, wrap up warm, it starts getting a bit chilly in Russia after October.