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 A day later an explosion at the Deepwater Horizon oil rig in the
Gulf of Mexico would deal the United States its worst offshore oil
spill, and BP would face the wrath of President Barack Obama himself
for the death and destruction it caused.
Over the next two months, BP shares lost nearly two thirds of their
value as the scale of the disaster threatened to sink the company.
Now some investors are sensing a better future than they had dared
to hope.
The shares are flirting with post-spill highs, and are the
second-best performer in the industry's top five behind Exxon Mobil
since the start of the fourth quarter.
This may have something to do with the misfortunes of its peer group — a profit warning at Shell, cost overruns at Chevron, and worries
about cashflow and production at Exxon — not to mention a
price-enhancing share buyback program put in place last year, but it
is still quite a turnaround in sentiment from 2010.
Then, the price of credit default swaps on BP bonds showed that even
its solvency was in question, and Shell thought it might have to
mount a rescue bid.
"It wasn't so much that we wanted to buy, more we thought the
British government might ask us to step in," recalled Peter Voser,
Shell's chief executive at the time, in a discussion with Reuters
last year.
Now, in a change of fortunes, Shell has warned investors that it
suffered its worst quarter since 2009 at the end of last year — albeit with little damage to its share price — while BP has reshaped
itself.
BP sold $40 billion worth of prime assets to stay afloat — and spent
$42.5 billion on the spill clean-up, fines and provisions for future
costs.
In a note published on Friday downgrading profit forecasts across
the sector, analysts at UBS predict BP's return on average capital
employed (ROACE) this year will be 11 percent — on a par with
Shell's.
BP shed a big chunk of its earning power to pay for the spill, but
got prices that now look enviable as the industry cycle turns down.
Rivals are now falling over each other to get assets on the block,
at the risk of driving prices lower.
A leaner, meaner asset base has emerged, too. Meanwhile, having
settled criminal proceedings, and two phases into a three-stage
civil trial, an army of lawyers is working to push remaining spill
fines and penalties way into the future. Barely a week goes by
without a new legal challenge from the British group aimed at
keeping a lid on its liabilities.
Explaining a bet it made on BP in a letter to investors last week,
U.S. hedge fund manager David Einhorn's firm Greenlight Capital said
investors were overlooking the company's improved return on capital
in its core business and remained too focused on the spill fallout.
Greenlight said it had bought BP stock at an average price of $47.39
a share. It said the company had a net asset value of nearly $70 a
share, even assuming it will have to pay out far more than it has
provided for. BP's U.S.-listed stock traded at around $48.60 on
Friday. Deutsche Bank — one of 13 investment banks with a buy or outperform
note on the stock, according to ThomsonReuters data, compared with
three rating it underperform or sell — argues that the net present
value of spill litigation has fallen.
"This is not to say that BP's position in the court trial has
improved ... rather... it is likely to be multiple years before
additional cash of any magnitude over and above that already agreed
flows from the BP balance sheet," the bank said in a research note.
The note estimated cash outflows from future fines at less than $1
billion a year over the next decade.
That is only about two weeks' worth of capital spending at current
rates.
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RUSSIAN QUESTION
But numbers rarely tell the whole story, as analysts discovered to
their cost in 2010 when they flagged repeated opportunities to buy
BP shares — all the way down from 6 pounds to a low of less than 3
pounds.
Some investors and insiders privately question the direction and
style of management since former chief executive Tony Hayward
resigned, taking responsibility for the spill.
Hayward's replacement, Bob Dudley, has extracted about $12 billion
from the company's troublesome Russian investment and given some $8
billion of it back to shareholders.
But he has yet to prove that the remaining half — which became a
19.75 percent stake in state-controlled Rosneft — is anything more
than a high-risk minority holding in a company based in a
politically unpredictable country, despite his seat on the board.
"Dudley doesn't seem to have that pally relationship you need with
Igor Sechin," said an industry source who has done business with the
Rosneft CEO.
The BP CEO himself remains confident of his Russian move. "BP's
strategic investment in Rosneft allows us access to growth
opportunities previously unavailable to us in Russia, one of the
world's largest producers of oil and gas combined with unparalleled
resource potential," he said in October last year.
Spill litigation still takes up a lot of management time, too. The
outcome of a New Orleans trial under judge Carl Barbier, conducted
under the terms of U.S. maritime law without a jury, is still very
much in flux.
BP is also banned, due to its criminal conviction for the rig
disaster, from bidding for any new U.S. licenses in the Gulf of
Mexico.
Time will tell, but for some, the company still has a long way to
go.
"BP has become a litigation-dominated company, and they have an
issue in Russia," said oil and gas blogger and independent industry
investment adviser Malcolm Graham-Wood.
"If they have a profit warning anything like Shell's, they will have
to buy back a lot more that 7 million shares a day to keep the price
up."
BP reports fourth quarterly results on February 4 and will update
investors on its plans for the future on March 4.
BP's net profit is expected to be around $2.7 billion on a
replacement cost basis for the quarter, down from around $3.9
billion a year ago based on BP's own poll of around 20 banks.
Analysts have recently been reducing their forecasts across the
industry and taking note of unexpectedly weak pre-results statements
from Chevron and Shell.
(Additional reporting by Svea Herbst and
Alex Chambers; editing by Will Waterman and David Stamp)
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