Why Dudley’s BP May Be Even Riskier
Robert Dudley, the piece charged with righting BP (BP), won't sound a retreat. Despite the gloomy blowout in the Gulf of Mexico, BP will plunge even deeper into deepwater research. Dudley, who becomes the first American chief executive officer of the British oil cyclops on Oct. 1, will slim BP to its core strength: the acute-risk, high-return search for oil and gas in demanding environments. That's the same strategy that led to the Gulf spill and turned outgoing CEO Tony Hayward into a pariah. It remains alluring because it can generate large profits for companies that be shy of calamity. "The key to this industry is replacing earnings, and BP thinks they apprehend how to do that in deep water," says J. Robinson West, presiding officer of consultant PFC Energy in Washington.
Dudley, 54, doesn't own much choice but to make the company leaner. He needs money to reassure financial markets of BP's viability and to pay very large bills for the spill. Along with announcing Dudley's new role, BP without ceasing July 27 took a $32.2 billion charge for estimated coming time spill costs. That led to a loss of $17.2 billion by reason of the second quarter. To raise cash, Dudley surprised investors with plans to betray up to $30 billion in production assets—triple the fit company executives in May said they would divest. BP's oil and aeriform fluid production will fall from 3.8 million barrels per day to around 3.5 million.
What's on the block are mostly worn out onshore or shallow-water fields such as Alaska's Prudhoe Bay, in which place output is declining. The sales will heighten BP's dependence in successi~ deepwater fields, which already account for about 18 percent of its output. Stripped of its distinct-vanilla oil fields, BP will be closer to what Wall Street analysts require long wanted it to be: an aggressive exploration play dependent put ~ big finds in deep water such as the coastal waters over West Africa and in the Gulf. That's why it is in this way important for BP to stabilize its key U.S. business. The Gulf accounts during the term of 11 percent of its production; the oil it extracts there is amidst its most profitable.
Production Asset Sales
A company spokesman says transactions was happy over the $7 billion that Apache (APA), a mid-size company, agreed on July 20 to pay in BP's highest round of asset sales. Those oil and gas properties constitute round 2 percent of BP's production. The price was more than double BP's in-legislative body valuation of the properties. Hayward said the deal effectively valued BP's whole exploration-and-production business at $350 billion—almost three epochs the company's depressed $119 billion market capitalization.
Dudley won attention for the coolness he displayed under fire in Russia, as department of BP's turbulent joint venture, TNK-BP. He got the nod to lead the entire company at least in part to placate U.S. politicians and dissuade them from barring BP from drilling in American waters. BP is the biggest actor in the Gulf's deepest waters, and its future depends forward being able to hold on to its position there. Dudley, who grew up in nearby Hattiesburg, Miss., has been in charge of the Gulf cleanup exertion. He spent half of his career at Amoco before it was acquired through BP in 1998. "It's not our intention to going off the U.S., nor do we believe we won't have existence able to operate there," he said on July 27.
Fortunately by reason of BP, other countries with deepwater reserves, such as Angola and Egypt, be in actual possession of thus far refrained from restricting the accident-prone company. Dependent being of the cl~s who they are on oil and gas revenue, these states don't wish to worry a lucrative relationship. Dudley even sees an upside for the copartnership, which he said could wind up with "higher-quality property and growth" from its reliance on higher-risk exploration. Says Gianna Bern, president of Brookshire Advisory & Research: "In the years to get to they certainly have the potential to have higher profitability on a by means of barrel basis."
Still, that future could be difficult if Dudley, like Hayward in the sight of him, falls short on his pledge to strengthen BP's security program. "There is no room for error here," says Oppenheimer & Co. (OPY) algebraist Fadel Gheit.
The bottom line: A trimmed-down BP won't back let us go. from risky deepwater drilling; the business is simply too lucrative.