BP Turnaround in Full Swing?

Gulf drilling to resume, but analysts still wary

Published in CSP Daily News

LONDON -- With much of its planned divestment complete and issuance its first drilling permit in the U.S. Gulf of Mexico since last year's catastrophic oil spill, BP executives feel they’ve reached a "turning point" in their efforts to rebound from last year's Deepwater Horizon crisis, though some analysts are quick to dismiss the thought.

CEO Bob Dudley on Tuesday reported a third-quarter profit of $5.3 billion, down 3.6% on a year-to-year basis but still slightly higher than most analysts had forecast. Revenue rose 35% to $95.4 billion. In announcing the results, Dudley said BP, with last year's Gulf of Mexico debacle receding, now enjoys a rosier future of higher production and strong cash-flow growth, according to a report in the Wall Street Journal.

The results come on the heels of a $4 billion settlement with one of its partners in the blown-out well that caused last year's spill and amid permission to resume drilling in the Gulf.

However, Dudley also said BP would increase its asset-divestment program from $30 billion to $45 billion—equivalent to a third of its current market value. The asset selloff includes two big U.S. refineries it announced it was selling earlier this year.

BP insists it is on the road to recovery from last year's Deepwater Horizon disaster, caused when a drilling rig it was leasing in the Gulf exploded, killing 11 men and triggering the worst offshore oil spill in U.S. history. BP has estimated it may cost as much as $40 billion to pay for the spill, including the cleanup and penalties. A slew of spill-related civil litigation is pending in a federal court in New Orleans.

To repair its battered reputation, the company put a focus on safety and launched a wide-ranging program of maintenance and repairs at 48 of its facilities, the newspaper reported.

But the overhauls put a lot of its fields out of action. That, coupled with the delays in BP's return to the Gulf and the effect of asset sales, has led to a big drop in production: it fell 12% in the third quarter. That meant BP was less able than peers such as Royal Dutch Shell PLC and Chevron Corp. to benefit from high oil prices, which soared this year owing to unrest in North Africa.

But Dudley insisted Tuesday that the company is at a turning point. "The low point in production has now been passed," he said. "Most of the big turnarounds this year are complete and production is rising again." However, he also said that BP wanted to get off the "treadmill" of constantly having to report higher production volumes. "We're going to focus on value rather than volume," he said.

That value will come from concentrating on high-margin barrels—oil fields that yield fat profits in places like the North Sea, the Gulf of Mexico and Angola—and investing more in exploration, with up to 25 wells drilled per year by 2013, compared with only six this year, he said. He predicted that by 2014 BP's operating cash flow will have increased by 50% compared with 2011. Half of the increase would be invested in oil and gas projects and around half paid out to shareholders in dividends and share buybacks. That raises hopes that BP will increase its dividend next February, possibly restoring it to the level it was before the spill.

But some analysts said BP was hyping up its return to financial health. They had already expected the company's earning power to improve over the coming years as it completes its maintenance program, restores full production in the Gulf and stops making payments to the $20 billion Gulf compensation fund. It will make its final contribution late next year.

Meanwhile, BP is still not entirely out of the woods: A criminal investigation by the U.S. Justice Department could find it guilty of gross negligence, which would leave it exposed to substantial fines and penalties. "If you own shares in the company today, you're taking on that risk, and it's not priced in by the market," Alastair Syme, an analyst at Citigroup, told the newspaper.

Analysts also want more concrete proof that BP can stop the slide in production. In particular, they want it to resume operations in the Gulf of Mexico, an area that accounted for a huge chunk of BP's output before the disaster and is a source of much of its future growth. "We really need to see them drilling again in the Gulf before we can get sanguine about production," said Jason Gammel, an analyst at Macquarie Research.

On that front, though, the signs are encouraging. Two weeks ago, U.S. officials approved BP's first offshore oil-exploration plan since last year's disaster. And this past week, BP was awarded its first drilling permit in the U.S. Gulf of Mexico since last year's oil spill.

In a statement, BP said the permit was "another milestone in our steady return to safely drilling in the Gulf of Mexico." It said it had secured it after several months of "hard work developing and implementing our new drilling standards."

Keywords: 
petroleum