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Drilling down

2 April 2012 By Kevin Allison

Two years after BP’s disaster in the Gulf of Mexico, the UK oil major has yet to convince investors it is undergoing the radical corporate change it promised to achieve. There is no sugar-coating the financial, human and environmental toll of Macondo. But the catastrophe prompted a needed bout of soul-searching and some long-overdue restructuring at the company. A new strategy emerged – to shed stodgy, mature assets and create a smaller, higher-returning company focused on its core competence in exploration. That was the right response. Still, BP’s road to renewal is proving a long one.

BP has made some positive strides. The third quarter of 2011 appears to have marked the peak of spill-related operational disruption. The dividend was resumed, albeit at about half of its pre-Macondo level, and subsequently raised 14 percent. The recent settlement with plaintiffs’ lawyers ahead of a Louisiana civil trial suggests that the risk of severe legal fines and penalties, while not yet gone, is at least fading.

Still, re-engineering BP’s portfolio is proving a challenge. An initial flurry of asset sales to pay for the cost of the spill has given way to more halting progress on disposals. BP has jettisoned some mature fields in the United States and the UK, and exited non-core countries like Colombia, Vietnam and Pakistan. But a $7 billion deal to sell Argentina’s Pan American Energy to China’s Bridas collapsed last autumn. BP has yet to find a buyer for its lower-returning U.S. refineries, including the Texas City facility where an explosion killed 15 workers in 2005. A self-imposed deadline to sell by the end of 2012 reflects the bleak outlook for refiners generally.

Upstream, BP remains a major player in the Gulf of Mexico, and has entered the deep waters off the coasts of Angola and Brazil. There’s also a deal to develop a new gas field in India. But last year’s botched share swap and exploration venture with Rosneft in the Russian Arctic was a huge waste of management time.

Big oil companies don’t turn on a dime. Chief Executive Bob Dudley is still focused on 2014, targeting a 50 percent jump in operating cash flow from last year’s $22 billion as higher-margin projects ramp up. But investors can expect only flattish production growth this year. Dudley will have to hope investors keep the faith.


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