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BP reaches US deal over Macondo disaster

BP has closed the darkest chapter in its corporate history with an $18.7bn settlement deal over the 2010 Macondo disaster

After five years of close involvement with crisis management, which killed 11 rig workers and spilled millions of barrels of crude into the Gulf of Mexico, its chief executive Bob Dudley can now focus more on growth once more, and relax a little with regard to its conservative debt gearing. It now stands at 18% compared with the pre-disaster range of 20%-30%. 

Announcing the second-quarter results on 28 July, he said the settlement was “a landmark for all concerned” and left BP “able to chart a clearer course, but the number is huge.”

That course will be dictated by its four objectives that conveniently begin with the letter D: delivery, divestments, discipline and dividend. It has brought on stream the Greater Plutonia project offshore Angola and completed six turnarounds under the first heading; but divestments are short of target at $7.4bn compared with $10bn (but nothing compared with last year’s total of $38bn).

With the low oil price, it will be more important than ever to drive efficiencies upstream. Its capex for this year will not be the $20bn forecast at the start of the year – so far it has spent $8.9bn – and projects than can be deferred, or “moved sideways” will be. The extent of the fall in costs and the extent to which the decline in the oil price may be arrested, are key factors. However, with the driving season now over and the possibility of more downside from the complicated Iran deal, the company has dug in for a difficult time. 

It says there is a lump of oversupply which is taking a long time to work its way through the system, and which explains the failure of prices to respond to geopolitics. 

At times like this, the company is glad it ignored the advice of consultants some years ago to split into an upstream and downstream business and shed its loss-making refineries. “We like integration,” Dudley said, and with the sale of the worse performing assets and the simplification of others, he says BP now has a very high-quality business producing gasoline, lubricants, kerosene and speciality chemicals.

Some relief in the shape of cost deflation has already been felt as offshore rig rates have come down by a fifth or more; and steel pipe is also cheaper. But costs will anyway influence the shape of the industry, Dudley said: wildcat wells miles from infrastructure won’t happen; but there will be a return to the “proven heartlands.” And “onshore drilling in Russia is very economic.”

Gas output rises

Among the shifts in the company’s portfolio is the rising role of gas, now at half the company’s output but due to account for as much as 60% by the end of the decade. Dudley pointed to Egypt, Trinidad & Tobago, Shah Deniz, Oman and North America as BP’s growing areas and said that gas had been less affected by the fall in oil prices. Despite indexation to oil and falling spot LNG prices, he said gas offered predictable cash-flow and some parts of the world were still short of gas, such as Asia, hence the expansion of the Tangguh LNG project with the addition of a third train. And payments from Egypt have continued to come in, reducing the government’s debt. However, it is not certain that it will be possible to deliver gas from Shah Deniz to Italy by the start of the next decade at a price that is competitive with Russian or Qatari gas.

Dudley does not see production in the Rumaila field – the world’s second largest, which it operates -- rising above 1.4m b/d despite there being spare capacity.

Terms of settlement

BP’s payment of $5.5bn in penalties under the Clean Water Act was more than the company had provided for but far less than the maximum possible penalty. It will also pay the US government and the states that ring the Gulf of Mexico another $12.3bn to cover economic and environmental damages. Another $1bn will go to local governments. 

The deal brings the total cost of the Macondo disaster for BP to around $53.8bn. That is well below BP’s initial estimates for costs and near the high-end estimates of $60bn many analysts mooted in the wake of the disaster. Still, although costly, the door is now closed on nearly all of BP’s outstanding legal claims – there are individual claimants that could yet push the total somewhat higher – giving BP a firmer footing to look to the future. Crucially, the settlement will allow BP to pay off the penalties over 18 years, leaving it with a manageable annual payment of around $1.1bn, an option a bidder for BP would not necessarily have.

The deal has won praise from Wall Street and the credit rating agencies. Moody’s upgraded its outlook on the company from negative to positive, and Fitch said it was likely to do the same once the settlement was finalised. Banks said the deal “cleared a massive cloud for BP and is therefore positive for the [company]”, and it would help “attract new investors, if not potential suitors.”

The company has sold off nearly $40 billion in assets, including refineries, much of its mid-stream business and oil and gas fields around the world but excluding its sale of its stake in TNK-BP to Rosneft. That has left it with a more focused portfolio focused on deep-water exploration but heavily reliant on the US Gulf of Mexico and Russia. 

The company was producing around 3.8mn boe/d in 2009, the year before Macondo. It produced 3m boe/d in 2014. The company once had ambitions of vying for the top spot among the oil majors. But its market cap of around $120bn is now about a third of ExxonMobil’s.   

The first order of business will be to maintain BP’s independence. The company’s management has reportedly been worried enough about a hostile bid that they war-gamed potential scenarios earlier this year. However, a takeover is perhaps less likely than it might appear at first glance. For one, David Cameron’s Conservative government sought to pre-emptively head off any potential suitors last year when it publically came out against a takeover of BP. 

ExxonMobil, which is cash rich and has said it is interested in making deals during the oil downturn, has been suggested as a suitor. But the companies famously have polar opposite business cultures – BP, industry lore has it, does things first, but ExxonMobil does them right and BP’s close ties with Moscow could also complicate any bid from the US major while sanctions are in place. 

Still, BP could seek a takeover of its own to help fend off any potential hostile bids and put itself back on a more robust growth path. If it did, BP would likely look for a deal that played to its strengths: deep-water exploration, such as offshore Brazil, where Petrobras needs to raise some cash. 

It would also likely look for some geographical diversification, such as west Africa, where it has tried and failed to expand in recent years. That could make companies with a deep well of offshore projects and a depressed share price such as Tullow Oil, Kosmos Energy or Cobalt Energy attractive targets. 

Alternatively, BP could pursue individual assets around the world to take advantage as companies look for quick cash injections. Bernstein Research says that an acquisition could also help bring down BP’s exploration spending per barrel of oil equivalent discovered, which at more than $15/boe is way above the industry average. 

If BP doesn’t pursue acquisitions it could struggle to grow in the coming years, particularly if oil prices remain low. Bernstein says that BP’s portfolio has fundamental weaknesses in the low oil price environment that could force the company into dealmaking, saying it awaited “the next strategic move by [BP].”

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