A Year Of Shocks For BP

Published in Company Comment on 12 October 2011

The recent history of this oil company gives cause for concern.

Shareholders of BP (LSE: BP) will remember 20 April 2010 for a long time to come. Until then they were a pretty satisfied bunch of people. The share price had been rising steadily over the past year, and closed the day before at 624p.

As oil prices recovered from the lows they had hit during the credit crunch the commodities boom looked set to resume and BP seemed a pretty good bet on rising crude prices. Everything looked set fair.

Disaster strikes

But then news started to spread of a serious accident in the Gulf of Mexico. A BP rig called the Deepwater Horizon had exploded, and eleven workers had been killed. Not only were the immediate effects of the explosion awful, but the wellhead had started to gush oil uncontrollably.

The spill would continue to spew thousands of barrels of oil a day into the Gulf of Mexico until 15 July 2010, by which time the BP share price had touched a low of 300p. The relief well that stopped the leak once and for all was finally completed on 19 September.

So began what must have been the worst period in the history of BP. The oil major was made a pariah by the American government, as dire predictions were made of an ecological catastrophe.

A long-lasting impact

Although such forecasts were overblown, the accident was to have a long-lasting impact on BP and, indeed, the whole of the energy industry.

First of all, there was the financial hit. The total cost of the accident to BP has been estimated to be as much as $40 billion.

Then there was the effect on BP's reputation, which has been terribly tarnished, particularly in the States. It was largely because of this that the chief executive at the time, Brit Tony Hayward, was forced to resign, to be replaced by Bob Dudley.

And then there was the hit on the company's future growth. A substantial proportion of BP's business was in the US, especially off-shore, and this business was now out-of-bounds. Plus the company had to sell off a range of non-essential assets to cover the costs of the Deepwater Horizon spill.

To compensate for the loss of reserves in the US, BP has been looking around the world for other sources of oil. Which drove it into the arms of the Russia oil major Rosneft and the Russian government in a bold initiative to search for oil in the Arctic.

But then BP found that it had completely, and rather naïvely, misjudged Russian politics. The oligarchs that BP was working with in the pre-existing TNK-BP collaboration stubbornly blocked the new initiative, and Rosneft had to find a new partner, which ended up being US rival Exxon Mobil (NYSE: XOM.US)

Lessons learnt

So what has BP learnt from all this? Well, perhaps the biggest lesson of all is that safety can no longer be just an after-thought. It has to be the number one priority.

The Deepwater Horizon spill was just the last in a series of accidents, several of which have been fatal -- notably the Texas refinery fire in 2005, which killed 15 people. BP's processes and systems for dealing with safety were just not up to scratch. To remedy this, Dudley has made maintaining safety a key objective in every employee's job scope.

The company has also learnt that it is becoming increasingly difficult to find new oil reserves to replace old, depleted fields. A lot of the easy pickings have either gone or are in the possession of national oil companies such as Saudi Arabia's Aramco or Malaysia's Petronas.

And as this is not the time to go deep-sea drilling in America, this leaves companies like BP having to deal with less welcoming regimes in countries like Nigeria and Russia.

Perhaps this is a sign that the much-debated theory of 'peak oil' is correct, and that oil companies now have to look further and further afield to replace their dwindling oil reserves. I suspect that this could be the beginning of a long-term decline in oil reserves for companies such as BP.

Be creative

Several other Fools have highlighted just how cheap BP is at the moment -- at its current price of 405p it is on a prospective P/E ratio of only 5.4 -- and I agree. That's why I am keeping hold of my shares in the company.

But when I think what BP could be, I look at its rival Royal Dutch Shell (LSE: RDSB). This company is already successfully thinking outside the box, making big investments in novel energy sources such as oil sands and liquefied natural gas.

In order to drive growth into the future I think BP needs to be just as creative, and just as good at execution. But I see little sign of this yet.

What's your view of BP right now -- let us know in the comments box below...

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> Prabhat owns shares in BP.

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ukvalueinvestor 12 Oct 2011 , 12:27pm

I still think it looks like good value. They've had some big problems, but compared to what they're likely to earn in the future, the price is attractive.

Getting out my crystal ball, it says that oil prices are likely to stay high for the foreseeable future so BP should tick along okay and, if they raise the dividend back to 20p plus, the shares are unlikely to stay around 400p once this euro crisis is over.

I think 600p is a reasonable target in the next few years.

John @ UKValueInvestor.com

BigJC1 12 Oct 2011 , 1:11pm

As a shareholder my major concern is management.

Any oil business can suffer a major disaster, it's in the nature of what they do. However, BP seem to stagger from crisis to crisis - alienating markets, incurring staggering costs and destroying shareholder value. At it's core BP has the asset base, know how and capability to be a market leader, unfortunately it seems to lack the senior management.

innocentatlarge 12 Oct 2011 , 5:20pm

This company has lurched from crisis to crisis and for me the Russian adventures smack of some desperation. The fish rots from the head and I think this is the consequence of a self-satisfied arrogance on the part of the Board which began before Hayward. I think this company is now accident prone and must be a pure speculative punt. Not my cup of crude at all.

4spiel 13 Oct 2011 , 1:34pm

Will be Ok s long as it recovers the dividend. But longer term it needs to be less reliant on any one country

Foodhoover 13 Oct 2011 , 3:30pm

OK so BP did things wrong, but look at what they have now and going forward, unless you have been sleeping you cannot have failed to notice the deals in Brazil with Petrobras and India with reliance, each of these has more in it than the rosneft deal and are in markets with proven infrastructure. Today they have announced big projects fro the UK with lifes ouot to 2050, the refining arm is being streamlined, and they are picking up opportunites in Australia to access the asia LPG market. OK so Shell and others are doing this too, but to say that BP is doing nothing is missing a trick. three years back the dividend payout was about $10bn, now it is about $5 bn, but they are paying $5bn a year to the american trust fund, once the final payment for this goes out in 2013 that cash is avaialble for re-investment or (hopefully) dividends. (by the way they are only just getting going againn in Iraq and have added 25% to the production there in under a year).

My view is that BP is undervalued but worth hanging onto at about £4 a share, I think it'd be worth buying at £5-5.50 truth be told. If you want to own major oil BP should be part of the mix, especially if like me you are employed by one and can get a boost through the share schemes.

Foodhoover is an engineer with a major oil company, he holds stock in Chevron, Shell, and BP and also holds stock in some of the Aim listed service companies.

merchantprince00 13 Oct 2011 , 3:54pm

Agree that the big problem now is perception of management and clarity of strategy. Since Lord Brownes implosion the succession strategy looks very flawed with Tony Hayward and Bumbling Bob. Each were brought in as a safe pair of hands but have failed miserably. The chairman also appears to be failing to keep a handle on the CEO failings either. Strategy appears totally absent. Hayward was supposed to address Health and Safety (look at where that ended up), Dudley was brought in for his Russian experience (hah). The only clear strategy in recent times was the communication and offload of assets post GoM which co-incided with a temporary recovery.

Board changes and a clear strategy required.

500tg3l 13 Oct 2011 , 4:24pm

While BP has had more problems than it should have, for whatever reason - the big problem any UK company has in the US is the US - they did the same to Toyota et. etc.

pickepics 13 Oct 2011 , 4:26pm

Give a dog a name, eh, guys, and why not? Forgotten already it was Shell management who were the duffers and BP was the darling of the markets just a few short years ago? Forgotten, too, that Shell was such a behemoth nobody was likely to turn it around?

Certainly many of the comments in the past tense are valid. But new boy Dudley seems to be moving along on the right tracks. A new safety division. Shedding low-return assets. Building high return assets. Defining lines of responsibility. Add to that the Russian tie-up suddenly sounding more collaborative, the USA authorities including the other two participants in the law suits.

These are positive signs along with mitigation of some of the negatives, with very decent coverage of most of it in recent issues of the FT. I only bought in recently, having heard his early pronouncements and am very happy to give him a chance to deliver.

If Dudley fails, watch out for a bidder with very deep pockets. Current shareholders are unlikely to lose. In either event, sell-off or growth and survival, I'd see 600p as a short term target. A much larger figure is on my horizon.

I'm with Foodhoover, who must have been typing at the same time as me.

northseaspinner 13 Oct 2011 , 6:47pm

Don't assume that BP's safety culture seen in North America is the norm around the world. BP has acquired many other businesses and their cultures over recent years, and it takes years to change ingrained beliefs. Goverment has a part to play as well. Look at the changes in legislation in North sea operating after Piper Alpha (Run by an American company) burnt down, killing 167 people. If anything, perhaps BP expanded too quickly and unfortunately started to own some (Not all) poorly run refineries and oil platforms that had been run down with lack of investment. Believe me, you couldn't cough in the North sea without a 2 hour meeting and a risk assessment as long as a python.
The company has very experienced and mainly loyal personnel working for it (Check out the website 'BP Global'). I believe that the company will become stronger in time, and we will look back at today's share price and wished we had bought a few more!

dougie186 13 Oct 2011 , 7:13pm

I agree with BigJC. Management needs strengtherning,.BP have a 40% interest in Vivergo who are building an ethanol plant near Hull.This is well behind schedule and they sacked the main contractor, Redhall Group.If BP management were really in control of the programme -were on top of the job -there would be no need for the sacking. Redhall are claiming £17m compensation. Maybe this amount isn't much to BP but it is a considerable amount to this good engineering company. BP have come a cropper with the big boys in the USA and Russia. Maybe they think they are untouchable in the UK. I wouldn't invest in BP until there is evidence that the management of the companyis working harder and gets the detail right.

DennyWhite 13 Oct 2011 , 7:56pm

Nothing wrong with BP - keep it as part of your base portfolio but for real gains in the oil world look at some of the smaller companies.

elopesi 14 Oct 2011 , 1:26pm

I bght into BP after oil spillage - sp at rock bottom as turned out to be. It recovered as expected, until the next fiasco - the Russian foul up. Just heard though that BP has received goahead for deep water drilling off Aberdeen. This could prove very worthwhile extention to GB oil reserves. So here's hoping Will hold on, also expecting to see sp reach 600 in next couple of years - proving no more hiccups.

pickepics 14 Oct 2011 , 6:04pm

DannyWhite, that looks like excellent advice to me. Our problem (I assume it's not only mine) is that it is a sector in which some modicum of technical knowledge beyond the purely financial is required to be able to analyse the smaller companies. Anything you can point us at to get at least the beginnings of what we need to understand?

Chongq 14 Oct 2011 , 9:18pm

The rot that started in the Sohio, Amoco and Arco ranks is in danger of spreading to infect all of BP. This is the key

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