Print | Share | Reprint

BP chief rallies troops while analysts ponder breakup

by Paul Whitfield | Published September 7, 2011 at 11:20 AM

Faced with the threat of a calamitous German invasion in 1939, the British government commissioned a poster asking the public to "keep calm and carry on."

The sentiment found a contemporary equivalent this week when Bob Dudley, the recently appointed chief executive of BP plc, implored his staff to ignore a spate of worrying headlines and "keep your eyes on the road." It's far from the Blitz, of course, but London-based BP has taken a sustained battering that has damaged its ambitions in the U.S., checked its growth in Russia and left management with a piecemeal Plan B growth strategy.

BP shares this week plumbed depths last seen when oil was pouring from its well in the Gulf of Mexico, while analysts continue to ponder the merit of a possible breakup of the energy giant.

Little wonder that Dudley felt compelled to rally his troops. His missive, issued Monday, covered the gamut of BP's woes while doing its best to put a positive spin on them. Reports of a new sheen on the water near the site of the fatal explosion of BP's Deepwater Horizon rig in the Gulf of Mexico were unfounded. A lawsuit filed by Halliburton Co., BP's former partner in Deepwater, would be "vigorously opposed," while a ruling by a New Orleans judge that victims of the oil spill could claim punitive damages also limited some other types of claims.

In Russia, the failure to secure a joint venture with state-owned OAO Rosneft to explore for oil in the Russian Arctic was "disappointing," but BP had "moved on." A raid by Russian police on a BP office at the end of August was the result of a "baseless" lawsuit, and was the sort of thing that BP had "dealt with ... before, as have many businesses in Russia."

Viewed individually, each rebuttal might be reassuring. But taken together, the unfortunate effect is to make BP out as a company suffering death by a thousand cuts.

Investors are worried. Shares in BP have slumped over the past six months, to below 365 pence, their second-lowest point in the past 10 years. The stock closed Tuesday at 371.65 pence, up 2.3%.

Analysts from UBS, Bank of America Merrill Lynch and J.P. Morgan Cazenove Ltd. have all suggested in recent months that BP should consider a breakup, following the lead of ConocoPhillips Co., which in July said it would spin off its refining assets to focus exclusively on exploration and production.

Dudley admits that the company has experienced "rough seas" but insists that a turnaround is under way and that "while there is some short-term pain ... this is simply good long-term business."

His argument that BP's woes are ephemeral is undermined, at least in part, by the one notable recent event not included on his list of woes, namely Exxon Mobil Corp.'s announcement Aug. 30 that it had agreed to partner with Rosneft in the development of Russia's massive Arctic oilfields.

It is of course not politic to speak of rivals, but for those looking for evidence that BP's current weakness will likely have long-term implications, the Exxon deal is instructive.

Exxon said it will invest $3.2 billion in a JV with Rosneft that will explore for oil in Russia's Arctic. It is the same role that BP created and then abandoned following a legal challenge from Alfa-Access-Renova, its partner in its existing Russian joint venture TNK-BP. It also makes it clear that BP, which offered an about $16 billion share swap to secure its JV, left a lot on the table in its negotiations.

Financial details of Exxon's deal remain limited, but politically the U.S. company clearly played a better hand than its London rival. "Unlike BP, ExxonMobil was not using the deal to bolster investor confidence, which probably strengthened its negotiating position," Morningstar Inc. analyst Allen Good wrote in a note published Aug. 31.

By avoiding a share swap, Exxon has ensured that state-owned Rosneft will remain at arm's length. The prospect of future asset swaps, which were written into Exxon's deal, should also incentivize the Russian company to be a good partner. "We assume ExxonMobil would have to see certain development or exploratory milestones met before Rosneft could gain any interest in its U.S. assets," Good said in his note.

The superiority of the Exxon deal suggests that there is a vulnerability to BP, stemming from its Gulf of Mexico disaster that was exploited by Rosneft. And that was before BP's Russian misadventure put Rosneft's huge Arctic reserves beyond reach.

Dudley is right to urge BP's rank and file to ignore the steady flow of bad news as a distraction to their day-to-day work. But the news is still damaging. BP's Russian setback means it needs new deals to replenish its long-term reserves. And the steady drip of negative headlines serves to highlight its weaknesses, suppresses its share price and hurts its negotiating position.

Unfortunately for BP and its beleaguered shareholders, the situation is likely to get worse before it gets better. Litigation from the Gulf of Mexico spill is due to begin in February.

Share:

Tags: BP | gasoline | oil | U.K.

Energy

BP chief rallies troops while analysts ponder breakup

Free preview

Meet the journalists

Paul Whitfield

Correspondent: Paris

Movers & Shakers

Video

PE sponsors choose IPOs as market rises

Sectors