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After Macondo: Why BP Is Still Pumping Strong


BP is finding growth in emerging markets such as Russia and India—and is even exploring in the Gulf

Almost a year ago, investors became so nervous in the weeks following the Macondo blowout in the Gulf of Mexico that they briefly wouldn't lend to BP (BP). They feared the British oil giant could be crushed under the weight of tens of billions of dollars in fines, cleanup costs, and payments to families of the 11 rig workers killed and businesses affected by the worst oil spill in U.S. history. They turned out to be wrong. Not only is BP still in business, it has more cash today than before the spill. Earlier this year the company negotiated massive energy deals in India and Russia. And, despite opposition from some in Congress, it has even resumed exploration in the deep waters of the Gulf.

BP is "showing it can get off the canvas and still has some fight left," says William K. Reilly, co-chairman of the BP Deepwater Horizon Oil Spill and Offshore Drilling Commission appointed by President Obama to investigate the disaster. It "did a lot of things right," he says.

Robert Dudley, the American who became BP's first non-British chief executive officer in October, deserves much of the credit for the company's resilience. He's used the company's enormous earning power to help make peace with Washington. Last June, even before taking over from Tony Hayward, Dudley helped set up the $20 billion Gulf Coast Claims Facility trust fund that to date has handed out just $3.6 billion in awards so far to individuals and businesses hurt by the spill. By the end of 2010, BP had spent another $10.7 billion on the cleanup, including the cost of deploying skimming boats, floating oil booms, airplanes, and crews that combed beaches and swamps for oily residue. It has also promised $500 million for academic research on the Gulf environment and support for the region's fishing and tourism industries. "There are few companies with the resources to do what BP has done," says J. Robinson West, chairman of consultant PFC Energy.

What BP has not been able to do is erase the memory of the spill. The U.S. Justice Dept. is considering manslaughter charges against some BP managers stemming from the deaths caused by the blowout, according to three people familiar with the matter. That would be a setback to Dudley's efforts to burnish BP's reputation and revive its stock price, off 29 percent since the Apr. 20 disaster. And the company still has enemies aplenty on Capitol Hill. U.S. Representative Steve Scalise (R-La.), blames BP for the loss of 12,000 jobs thanks to the drilling moratorium that until recently halted new deepwater exploration. BP "hurts the rest of the industry in ways that aren't fair," says Scalise.

BP has the financial flexibility to weather most storms. Despite its hefty spill-related spending, BP's cash pile more than doubled in 2010, to $18.6 billion. Free cash flow will likely be another $8 billion to $10 billion this year at current oil-price levels, estimates Fadel Gheit, an analyst at Oppenheimer & Co. (OPY) in New York. Gheit figures BP has a breakup value of $300 billion, making it able to fund losses well over the $41 billion in spill-related costs it has already written down. Gheit doubts BP's losses will exceed that level.

As its energy business returns to something close to normal, BP on Mar. 28 resumed paying its quarterly dividend, which was suspended after the spill. Perhaps most surprisingly, the company has yet to lose substantial business in the U.S. BP has a 47 percent stake in a site called the Santiago prospect, which on Feb. 28 received the first U.S. license to resume drilling in the deepwater Gulf after a 10-month halt. BP won't call the shots at Santiago, which is operated by Noble Energy (NBL), but it will likely influence matters such as well design.

Dudley has used the need to raise cash as an opportunity to reshape BP's portfolio with energetic dealmaking. The company has already sold off $22 billion in properties it deemed least likely to turn big profits, and it has promised to divest half of its lackluster U.S. refining operation, including a facility at Texas City where 15 people were killed in an explosion in 2005. At the same time, Dudley has felt bold enough to pursue two major deals this year to add resources. The first, with Russia's Rosneft, envisions a $7.8 billion share swap and access to potentially huge—but still uncharted—oil fields in the Arctic. In the other, BP will pay $7.2 billion for a 30% stake in 23 offshore exploration blocks operated by India's Reliance Industries. BP's total investment in the Indian project could eventually come to $20 billion, BP says. "The divestment and investment has put an emphasis on high-risk exploration, which is clever," says Alastair R. Syme, managing director of energy research at Citigroup (C) in London.

Dudley's fast pace hasn't been bump-free. Signing the deal with state-controlled Rosneft has angered BP's Russian billionaire partners in its existing 50 percent-owned Moscow-based affiliate TNK-BP. Those oligarchs succeeded on Mar. 24 in persuading a London arbitration panel that the Rosneft deal violated their shareholder agreement with BP, which they say was intended to keep TNK-BP as the British oil giant's major Russian partner. Although that's a defeat for Dudley, who earlier had a stormy tenure as CEO of the joint venture, analysts still think the deal is likely to eventually go through in some form—perhaps with BP paying up to keep its partners happy. Explains Brian M. Youngberg, an analyst at Edward Jones: "The last thing BP needs is more uncertainty."

The bottom line: Rather than retreating, BP has more than doubled its cash on hand and has agreed to spend more than $15 billion on expansion.


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