Predators keep BP in their sights

A YEAR ago the outlook was dire for BP. The oil had stopped flowing in the Gulf of Mexico following the Macondo oil rig disaster. The British oil giant was seen as having virtually no guaranteed cash as indeterminate liabilities linked to the environmental calamity loomed.

BP had lost its PR-gaffe prone chief executive Tony Hayward, who had fallen deeply out of favour with President Barack Obama and the battered US fishing communities.

An apparently shortlived corporate renaissance for the company as a would-be explorer of the Russian Arctic in conjunction with state-owned Rosneft, announced earlier this year, has become mired in litigation, and now looks dead in the water.

Things got little better for BP last week when its second-quarter trading results were overshadowed by rival Royal Dutch Shell, a stark contrast in the recent fortunes of the two oil majors. BP could only post a 13 per cent rise in profits to $5.6 billion (3.4bn), while Shell's earnings gushed 77 per cent to $8bn (4.9bn), leading many in the City to ask "Whither BP?"

Some believe that despite its partial recovery from the Gulf spill it is still a vulnerable player on the world scene, and that it might be gobbled up by another giant. The sceptics believe an alternative is a possible break-up of the company, with its "downstream" marketing, refining and petrol station business spun off from its exploration arm.

Industry-wide downstream earnings have come under the cosh in recent years from tougher environment laws and leaner profit margins. Often earnings have been flat at best. BP's downstream profits came in at $1.4bn last week against $1.7bn in the same quarter of 2010, while the company's exploration and production profits rose to $7.3bn from $6.3bn.

City analysts say in trying to restore shareholder value it is unlikely new chief executive, American Bob Dudley, will rule anything out, while BP refuses to comment on a potential demerger. There was speculation that Shell might be the rival to swoop with a takeover bid for the whole group, exploiting its continuing vulnerability in the aftermath of the Gulf disaster. But apart from the undoubted anti-trust complications such a bid would trigger, Shell stressed an emphasis on organic growth at its results last week.

Meanwhile, the City jury seems to be out on whether Dudley is the man to lead the company forward after initially steadying the ship post Hayward's antagonising of the US.

The joint alliance with Rosneft in the Arctic was meant to help BP rebuild credibility with investors. But Dudley, an old Russian hand, woefully underestimated the sensitivity to the tie-up of BP's existing Russian partners in the BP-TNK venture.

One analyst said: "It was disappointing BP went so gung-ho on the Rosneft deal back in February, portraying it as a done deal when it was anything but. Part of the job of a chief executive is to deal with the political side. It wasn't Dudley's finest moment. The shares hit 5 when the deal was announced. That was some sort of recovery. Now they are back at 455p."

This will have displeased BP's investors, but at least dividend payments have been resumed at seven cents a share for the past three quarters after being suspended for the first three trading quarters of 2010 because of the Mexico disaster. However, there is still some way to go to repair fences with shareholders, as dividends are running at half the pre-Mexico level.

Bulls of the company, however, say its apparent woes are overplayed, and that it has made steady progress since the dark days of the spring and summer of 2010. They say it has enviable assets worldwide, including new deepwater assets in attractive target areas such as Brazil, Australia, the South China Sea and Indonesia.

They say the company has proved it is financially robust. It has achieved $25bn of the $30bn of asset sales it announced in the wake of the Gulf blowout to help pay out its liabilities and keep its balance sheet strong.

Jonathan Jackson, oil analyst at stockbroker Killik and co, said: "I'm positive about the company. The results last week were worse than expected but it is only one quarter.

"The fall in production (from 3.85 million barrels of oil equivalent per day to 3.43 million] was partly due to the asset sales. Also, the prices they have been getting on their asset disposals have been very good, partly helped by the high oil price. They are above book value and more than the market expected they would get."

BP has promised to double its exploration for hydrocarbons from now to 2015, with between 15 and 25 new wells planned every year. The market was impressed by the company's recent $7.2bn deal announced with Reliance Industries of India, by which BP will take a 30 per cent stake in 23 oil and gas blocks in the country. It looks goods on paper. BP supplies the deepwater expertise, Reliance has the undoubted government contacts.

The company is also rebuilding bridges in the US. It has already paid claims and damages of $6.8bn stateside from the spill, and separately pledged $500m into an independent environment research project into the disaster.

Supporters also believe Dudley's work on improving BP's safety record, vital considering the group's other disasters such as Alaska and the Texas City oil refinery, has not been sufficiently recognised.

BP confirmed this week that it had not yet applied for permission to drill its first new Gulf well since Macondo, as it wanted to improve its drilling procedures before making applications.

A separate "safety division" has also been created within BP, through which all potential projects have to be assessed before making their way up the chain to Dudley for approval. If the safety team think there are risks the whole idea can be knocked back, whatever the juicy returns being projected.

Meanwhile, BP claims it is also not on the back foot in the North Sea. It has committed to the $3bn Schiehallion project off the Scottish coast, redeveloping and extending the life of a major field.

A BP spokesman said. "After Deepwater Horizon in the Gulf we said that 2011 was going to be a year of consolidation and transition. That is going very well. We expect to see momentum returning to our business in the rest of 2011 and into 2012." The City will be watching with interest.