BP back in favour despite spill legacy, Russia doubts
COMMENT RECEIVED: In this article there is a comment from Peter Voser about a possible need for a rescue of BP by Shell following the Macondo disaster in 2010. Knowing that merger negotiations between Shell and BP also occurred more recently, one possible interpretation of the article is that BP’s own strategy might help Shell put its house in order, while Shell’s access to US licences might help BP. Both companies are currently targeted by investigations of manipulation of the price of Brent.
* BP shares still down from day before U.S. oil spill
* But shares up two thirds from post-spill low
* BP reshaped, competitive on return on capital, delaying spill costs
* Still beset with litigation, and its Russian investment unproven
* Q4 results due Feb 4 against backdrop of rivals’ weak statements
By Andrew Callus
LONDON, Jan 26 (Reuters) – If you had spent 10 pounds on BP shares on April 19, 2010, you would have just nine pounds now, including dividends. A poor investment, however you cut it, but also a remarkable recovery.
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 programme 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.
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. licences 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 Feb. 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)
SOURCE
COMMENT RECEIVED FROM A REGULAR CONTRIBUTOR: “OUTSIDER”
John
In this article there is a comment from Peter Voser about a possible need for a rescue of BP by Shell following the Macondo disaster in 2010.
Knowing that merger negotiations between Shell and BP also occurred more recently, one possible interpretation of the article is that BP’s own strategy might help Shell put its house in order, while Shell’s access to US licences might help BP.
Both companies are currently targeted by investigations of manipulation of the price of Brent.
Dan Romasko Named President, CEO of Motiva Enterprises LLC
HOUSTON – January 27, 2014 – Dan Romasko, former Executive Vice President of Operations for Tesoro Corporation, has been named President and CEO of Motiva Enterprises LLC. He replaces Bob Pease, who has served with distinction for the past 5 years and will return to Shell, effective February 1.
City awaits details after Shell shock
After the shock update effectively publicised the firm’s headline figures for the final quarter of last year, this week the City will be looking for clues as to whether Shell’s shrinking bottom line is temporary or structural.; …the new boss appears keen to make changes at the notoriously bureaucratic company.
by DOMINIC JEFF: 26 Jan 2014
OIL major Royal Dutch Shell is expected to reveal huge write-offs this week which investors hope will account for its recent profits warning.
After the shock update effectively publicised the firm’s headline figures for the final quarter of last year, this week the City will be looking for clues as to whether Shell’s shrinking bottom line is temporary or structural.
In its warning, Shell said that profits will almost halve to around $2.9 billion (£1.8bn). With previous market expectations of a $4bn haul, it will be the latest disappointment for shareholders after the firm’s earnings declined dramatically throughout 2013.
But Tony Shepard, an analyst at wealth manager Charles Stanley, said he feels it is likely that one or two “big numbers” will be behind the latest miss. He thinks the firm could post exploration losses of $1bn, accounting for most of its shortfall on forecasts in a manner that will not alarm investors.
The firm has already made large write-downs on its investment in the US shale liquids industry in recent quarters. Confidence that Shell’s difficulties are due to temporary factors account for the fact that its share price held up well.
However, the company has said that the revised earnings figure reflects poorer results in each of its upstream, downstream and corporate divisions. In full-year results the firm will likely emphasise that cash-flow has held up much better than bottom line profit, while 2013 has been an expensive year in terms of capital outflows.
The group generated more than $40bn in cash during 2013, and spent almost $45bn on capital projects and acquisitions. Its dividend yield of more than 5 per cent remains a solid backstop to the share price.
But Shepard said the oil giant’s new chief executive, Ben van Beurden, still has questions to answer following his comments that the recentperformance was “not what he expected” from the firm.
“I think people will be interested to see the detail,” Shepard said. “There are a number of factors they have to explain. The next few weeks are quite important for the company.”
Another factor that helped Shell’s shares to shrug off the warning was talk that Van Beurden was “kitchen sinking” – a tactic where a new chief executive paints a darker picture of current performance in order to be seen to make improvements later.
Whether that is the case or not, the new boss appears keen to make changes at the notoriously bureaucratic company. Just last week he provided a glimpse of a new strategy by selling Shell’s interests in an Australian liquefied natural gas (LNG) project for $1.1bn. Van Beurden said Shell, which has become a world leader in the LNG sector, would remain a major player in Australia’s energy industry.
But he added: “We are refocusing our investment to where we can add the most value with Shell’s capital and technology.”
Analysts say Shell could look to raise $15bn through divestments this year, with its share in Australian group Woodside Petroleum one of the prize assets it could look to sell.
The new boss is due to make a speech outlining his strategy in March, but with pressure already mounting he will face questions on Thursday when he explains why full-year profits fell by almost a quarter in the last year of his predecessor’s reign.
Neill Morton, an analyst at Investec, said: “With the new chief executive starting in January, the market is hoping that the weak profits in the fourth quarter in particular will give him more power internally to change things.”
Court Ruling Won’t Be Enough To Stop Arctic Drilling
By Sean McLernon
Law360, New York (January 24, 2014, 7:54 PM ET) — A recent Ninth Circuit ruling rejecting a federal environmental analysis of Arctic drilling has been hailed by green groups as reason to halt energy extraction off the Alaskan coast, but attorneys say the decision is too narrow to stop oil and gas activities from moving forward…
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