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BP's Asset Sales and Brand Destruction
Wednesday, July 21, 2010
TAGS: ENERGY NEWS
Some Complications in BP’s Asset Sales
BP announced late Tuesday afternoon that it had agreed to sell $7 billion of onshore oil and gas assets in Texas, New Mexico, western Canada and Egypt to Apache. BP has been exploring the sale of assets, including its stake in the rich Alaskan oil fields of Prudhoe Bay, to raise money to pay for its oil spill disaster in the Gulf of Mexico. But negotiations over the sale of half of its stake in the field appear to have faltered, according to Bloomberg News. The sale is expected to bring in more than $10 billion.
For a company in BP’s situation, selling assets is anything but simple. Because of both continuing concerns that BP might at some point seek bankruptcy protection, and because BP’s creditors could later — even years later — seek to unwind an out-of-court asset sale as a “fraudulent conveyance,” any sale would come under heightened scrutiny, said Peter S. Kaufman, president and head of restructuring and distressed mergers and acquisitions at the Gordian Group, a New York investment bank.
“The buyer of the assets needs to be very comfortable that the sale won’t eventually be clawed back,” he said. A court might also eventually order that any asset sold by a company in distress be encumbered with some of the liabilities of the seller. “The buyer of these assets would like to buy it free and clear of the gulf environmental liabilities,” Mr. Kaufman said.
So a buyer of substantial BP assets “would have to bake into the purchase price the added risk that such complications might occur, even if at first blush the subject assets were not in the BP subsidiary at ground zero for the gulf spill — while a less-risk-averse buyer might even insist that the sale be conducted through a bankruptcy process,” Mr. Kaufman said.
Can BP Ever Rebuild Its Reputation?
If you thought things couldn't get any worse for BP, think again. Three months after the Deepwater Horizon explosion caused up to 184 million gal. of oil to spill into the Gulf of Mexico, BP thought it had finally managed to stop the flow on July 15 — until company and U.S. officials cautioned on Sunday, July 18, that while the cap is holding, there are signs of possible leakage on the sea floor. And BP is already facing cleanup and legal bills to the tune of $60 billion. But a company worth $350 billion can survive a hefty financial hit. The damage to BP's image, however, is far more costly — and will take much longer to fix.
A lot of the blame, say public-relations experts, falls on BP's executives. "It's astonishing in today's media-savvy world that such a colossal and ongoing p.r. mess can be made," says James Herring, co-founder of the London public-relations firm Taylor Herring. "It's left people in the p.r. industry scratching their heads." BP had a public nightmare on its hands the moment the rig blew up on April 20. Since then, say experts, the company has exacerbated its situation with critical missteps that could affect it for years to come. "The brand-image costs will be there for a long, long time," says Nirmalya Kumar, professor of marketing at the London Business School. "For years, the first thing people will think about when you say 'BP' is the spill." (See pictures of the Gulf oil spill.)
Among BP's blunders, says Kumar, was its ignoring what he calls "the four c's" crucial to crisis management: candor, compassion, commitment and contrition. Here, according to Kumar and Herring, are BP's biggest p.r. mistakes so far — and how the company can fix them:
Downplaying the news: Until the disaster became too big to ignore, BP downplayed it so much that some people might have missed the news altogether. On April 27, a week after the Deepwater Horizon exploded, BP released its earnings statement for the first quarter of 2010, with news of the disaster stuffed into three sentences at the bottom of page 4, underneath several paragraphs about acquisitions and a rocketing 135% profit increase over the previous quarter. It failed to mention that 11 workers had been killed in the explosion. One of the three sentences about the accident read, "BP is committed to doing everything in its power to contain the environmental consequences of the incident." But the statement offered no information about how serious the incident was. So much for candor.
Being tone-deaf: Even after the scale of the disaster became clear, BP seemed unaware of the depth of anguish about the explosion. "There was a complete misjudgment of public sentiment," Herring says. As an example, he points to the moment on May 30 when BP CEO Tony Hayward told reporters in Louisiana, "I would like my life back." Despite the furor that remark caused, a month later — with the well still spewing oil into the Gulf's waters — Hayward was photographed vacationing on his yacht during a race off England's Isle of Wight. A BP spokesman said Hayward was "spending a few hours with his family ... I'm sure everyone would understand that." They did not. Herring believes the yacht image "derailed" BP's attempts to get its public relations back on track. In comparison, Kumar and other public-relations experts cite Johnson & Johnson as a model for companies to follow: in 1982, when Tylenol Extra Strength tablets were discovered to be tainted with cyanide, Johnson & Johnson executives attended the funerals of the seven victims and were filmed weeping at the gravesides. That's the type of compassion BP has been seen to lack.
Hiding behind green: The branding company Landor redesigned BP's logo in 2000, creating a green-and-yellow sunflower whose purpose, says Landor on its website, was to cast BP as "an environmental leader [with] a goal of moving beyond the petroleum sector." Oops. The fact that BP has for years presented itself as an environmentally friendly company "has made the oil spill even worse," says Kumar. "You talk green, green, green, but you are still a big oil company," he says. "It is almost as if they wished they were in a different business." The chasm between image and reality makes people question BP's sincerity, he adds. Strike three on commitment.
Blaming others: During a televised congressional hearing on June 17, Hayward said he was not to blame for the safety failings of the Deepwater Horizon since, as chief executive, "I was not part of the decision-making process." He won over few lawmakers on Capitol Hill that day. Republican Representative Phil Gingrey of Georgia accused him of "copping out," while Democratic Representative Henry Waxman of California told him he was "kicking the can down the road." What Hayward should have done, says Kumar, was "to right away admit and assume responsibility," which would have shown the contrition Kumar thinks is vital to restoring BP's image. (See 12 people to blame for the oil spill.)
Hayward's failure to make friends among U.S. politicians could present new problems for BP on an entirely different front — Libya. BP admitted last week that while negotiating a $900 million energy deal with Libya, its executives had expressed their concerns to British officials about Abdel Basset Ali al-Megrahi, the Libyan convicted of the 1988 Lockerbie bombing, whose imprisonment in a Scottish jail threatened to complicate the deal.
The Scottish government freed al-Megrahi last August on compassionate grounds after he had spent eight years in jail for his role in blowing up a Pan Am jet, killing 270 people. At the time, doctors had given al-Megrahi, who suffered from prostate cancer, no more than three months to live — nearly a year later, he is still alive, living in a sprawling new house in a Tripoli suburb. With BP's image now in tatters, the company's role in the affair has surfaced as a source of fresh anger. The Senate Foreign Relations Committee said Thursday that it would call BP officials to testify at a hearing on al-Megrahi's release on July 29. (See more on the Lockerbie bomber's release casting a shadow over Muammar Gaddafi's celebrations.)
To begin repairing BP's reputation, both Kumar and Herring suggest flooding journalists with constantly updated information about the Deepwater Horizon — a step the company has already taken by placing footage of the cleanup efforts on its site.
Once the oil spill has been contained, BP "needs a total brand overhaul," Herring says, including even a name change "in order to hit the delete button on the bad history." And both Kumar and Herring predict BP will get a new CEO once the oil spill is over — most likely someone unconnected to the current management. As for Hayward, "I don't think [he] will have a second career in p.r.," says Kumar.
Tuesday, June 29, 2010
TAGS: ENERGY NEWS
BP Approaches Funds to Fend Off Takeover Bids: Source
British oil company BP has approached sovereign wealth funds with a view to securing a strategic investor to fend off takeover bids while it deals with its massive U.S. oil spill, a senior UAE source said on Tuesday. BP executives have held talks with a number of sovereign wealth funds (SWFs) including Abu Dhabi, Kuwait, Qatar and Singapore, the source told Reuters under condition of anonymity. "BP is seeking a strategic partner so it doesn't get taken over by other major oil companies such as Exxon and Total," the source said. "It's BP that is approaching the sovereign wealth funds not the other way round. They are the ones in need of a partner."
The Government of Singapore Investment Corp (GIC), one of two sovereign wealth funds in the nation, already owns around 0.7 percent of BP via a 122 million share holding, according to Thomson Reuters data. GIC was not available for comment. Temasek, another Singaporean state fund, declined to comment. "It's normal sovereign funds are looking into it. Most of them are probably not going to buy on the market," said a Middle East based investment banker familiar with the matter. "They would consider a PIPE investment . BP has 2 choices, either sell assets or raise capital and this is under discussion," he added. The size of any stake sale would be at least $500 million, the banker said. Another banking source familiar with the matter said talks were still preliminary and that BP had yet to offer blocks of shares to SWFs.
For BP, it would be important not to undercut existing shareholders by offering a special deal to SWFs, bankers said. BP had started marketing programs to convince funds that its share price is low enough to encourage them to buy on the market, he said. "If they get a special price they would invest," he said. "But if they do and it's not the same deal as for existing shareholders, it would be a PR nightmare for BP." Existing shareholders on Monday balked at reports that BP was looking to sell a stake, questioning whether it really needed a strategic partner. Libya and China were also among those interested, the second source said.
BP shares have lost more than half their market value since the spill in the Gulf of Mexico was unleashed on April 20, the result of an explosion on a drilling rig that caused the undersea well to rupture. Attempts to stop the flow have not worked, with BP pinning hopes on a relief well that should be completed in August. BP has said it hopes to raise $10 billion from asset sales this year as part of its plan to fund a $20 billion clean-up fund set up under pressure from U.S. authorities. Several newspapers reported interest this week among SWFs in buying some of BP's assets in the Middle East and Asia. Britain's Sunday Times said BP's advisers were trying to drum up interest among rival oil groups and sovereign wealth funds to take a stake of between 5 and 10 percent in the company at a cost of up to 6 billion pounds ($9.1 billion).
BP Says No Plans for Share Issue
BP PLC said Tuesday it has no plans to issue new shares to help pay for the Gulf of Mexico oil spill, giving its shares a further boost amid rumors of interest from sovereign wealth funds. BP spokesman Mark Salt said that BP "is always happy to welcome new shareholders or existing shareholders who wish to increase their shareholdings, but there's no current plans to issue new equity to anyone." The company's statement is good news for investors whose own holdings would be diluted by a larger stock base.
Recent reports have suggested that a number of Middle East sovereign wealth funds are considering purchasing a stake in BP, helping calm fears of a full takeover. BP declined to comment on "market rumor and speculation." Shares in the company were trading 2.7 percent higher at 342.35 pence ($5.20) in afternoon trade on the London Stock Exchange. Many analysts view the stock, which had at one point since the spill lost $100 billion in market value, as oversold. Royal Bank of Scotland on Tuesday upgraded the stock to "buy" from "hold", setting a target price of 455 pence. "Our base case scenario is significantly less pessimistic and in our view, the risk/reward profile of the shares is currently favourable," RBS analysts said in a note. They said that the operation of relief wells, due to occur around the middle of this month, will be a turning point for BP's shares. Stopping the flow of oil will cap the physical volume of the spill, reduce the daily costs being incurred, cool the political temperature and, if BP's share price remains excessively depressed, it could trigger credible merger speculation," they said.
BP May Need Radical Rethink
Hopes are rising that BP's first relief well will stop the flow of oil into the Gulf of Mexico earlier than expected. If it does, it might also bring forward the end of something else: BP as we know it. The disaster in the Gulf of Mexico comes after a string of other high-profile foul-ups. Assuming BP emerges from the acute phase of the crisis intact, its stock risks suffering an ongoing discount. Hence, analysts are postulating radical scenarios like the company being broken up or taken over.
BP might take some comfort in the market's capacity for forgiveness. In terms of a price/earnings multiple, BP's stock has traded at a premium to that of Royal Dutch Shell's for most of the past decade. BP's multiple dropped noticeably in the month following the Texas City, Texas refinery explosion in March 2005. But while its premium over Shell diminished, it wasn't extinguished, and began widening again in 2006. Indeed, the stock suffered a sharper downgrade in late 2002 when BP repeatedly missed growth targets. Other setbacks, such as the Alaskan pipeline leak in 2006, had little discernible effect. Meanwhile, the 2008 tussle over control of the Russian TNK-BP joint venture occurred as the financial crisis sent markets haywire, making it difficult to isolate its impact on BP's multiple.
But even the market's patience is finite, and as setbacks have mounted up, the clear trend since 2002 has been for BP's premium to Shell to narrow and then, since the Deepwater Horizon disaster, plunge to a deep discount. Moreover, since 2004, Shell's stock has been burdened with the legacy of the company's reserves-accounting scandal, helping BP to preserve its premium even after its own setbacks.
The Gulf of Mexico disaster undermines several core elements of BP's investment case: deep-water expertise, renewed focus on safety, financial flexibility, and political nous. This is doubly important because it has become harder for the majors to differentiate themselves. Back in 2000, the highest rated oil major's price/earnings ratio was, on average, almost double that of the lowest rated. That spread has compressed over the past decade as the majors as a group have struggled to demonstrate tangible benefits to being bigger. So far this year, excluding BP, the spread has averaged just 31%.
Looking beyond the immediate future, it's difficult to see how BP can craft a compelling investment case with a business-as-usual approach. A far-reaching management shake-up looks all but certain. But with BP's strategic position so undermined, it could require more radical action to recapture investors' imagination this time.
BP Would Be Barred From Offshore Leases Under Bill
June 30 (Bloomberg) -- BP Plc would be barred from new U.S. offshore oil and gas leases for as long as seven years under legislation being drafted by Representative George Miller, who cited the company’s safety and environmental violations. BP “has a flagrant history of taking risks to boost profits that has resulted in deaths of workers, destruction of the environment and economic chaos in local communities,” Miller said today in an e-mailed statement. Miller plans to offer his bill as an amendment to legislation that would overhaul drilling rules. President Barack Obama’s administration and lawmakers are considering penalties that would limit BP’s U.S. operations. In addition to BP’s Gulf spill, Miller cited a 2005 explosion at BP’s Texas City refinery that killed 15 workers and a 2006 pipeline leak that dumped 200,000 gallons of crude at Prudhoe Bay, Alaska, as reasons for his legislation. Serial violators ought to face consequences, and one of those consequences should be denying” BP and oil-producing companies “with this kind of record the right to drill in America’s offshore waters,” Miller said in the statement.
The U.S. also may revoke BP’s status as operator of producing wells in the Gulf, such as Thunder Horse, or of leases at Prudhoe Bay, David Pursell, a managing director at Tudor Pickering Holt & Co. LLC, a Houston investment bank, said this month. Congress also is weighing measures to bar BP from contracts with the Department of Defense and Environmental Protection Agency.
Miller said his legislation would block the Interior secretary from issuing offshore leases to a company that is determined to be a danger to workers and natural resources based on a review of records for all subsidiaries and partnerships. Spills in the Gulf, Alaska and the Texas City refinery explosion are “part of a pattern of BP’s history of reckless behavior,” Miller said.
N.Y. Fed Examines Wall St. Exposure to BP
June 29 (New York Times) -- The Federal Reserve Bank of New York has been examining major financial firms' exposure to BP to ensure that if the oil giant buckles under the costs of the Gulf oil spill, it won't put Wall Street or the global financial system at risk, two sources familiar with the matter told Reuters.
After poring over documents and asking banks about their exposure to BP over the past two weeks, the Fed found no systemic risk, and hasn't asked firms to alter their credit relationships with BP, the sources said.
"The Fed gave banks' exposure to BP a passing grade," said one of the sources on condition of anonymity.
Beyond's BP survival prospects, the Fed examination underscores market uncertainty about how the spill's staggering clean-up bill might affect Wall Street, a fragile economic recovery, or the multitrillion dollar energy market.
BP until recently had stellar credit ratings and generated $30 billion of cash from its oil and gas production and trading over the last year, making it a golden counterparty for many financial firms that trade in energy, including the largest Wall Street banks.
Since April, when it began trying to plug an oil spill that has spewed up to 60,000 barrels a day into the U.S. Gulf, the company has lost $100 billion in stock market value and suffered several credit downgrades.
The soaring liability risk raised concern in banking circles that the company's financial woes could spread outside BP, prompting the Fed's examination.
Should the unexpected happen, and BP file for bankruptcy, the economic stakes are huge, potentially affecting the portfolios of some of the world's top banks and funds, not to mention up to 23,000 American jobs, the price of oil, and the easy credit that banks give to big oil companies.
Fed and BP officials declined comment. Banks that trade with BP wouldn't comment publicly.