Tuesday 1 June 2010

Time to fix BP - but not time to buy.

Prompted by an email from long-time reader Steven L, it is time to discuss how on Earth BP are going to get out of the mess that they have created in the US.

Firstly, this is going to pan out as amongst the worst environmental disasters ever. A truly epic failure to manage to blow a rig pumping so much oil directly in the Ocean. The effect on the US coast is and will be awful and I feel sadness that such a fine place, which I have visited a few times, will have to cope with such a disaster for years to come.

However, despite the current news, it reflects badly on the US government that they are so critical of BP. After all, they do not have the technology or know-how to try and stop this disaster and are reliant on BP to fix it. Shouting at them in a pure populist driven mania is all very well, but really if they think BP that are doing all they can what can they do? Nationalise them?

From BP's perspective they need to do a few things:

1 - Be honest, don't try and spin things as this will get found out by a hostile US media.
2 - Sack Tony Hayward. In the US the bad guys in movies are always well spoken Brits. As such appointing Bob Dudley the new CEO, an all-round American good guy, is just a sensible thing to do. Moreover, Hayward has made a few gaffes under huge pressure; most people would, but now is a good time as a sacrificial lamb is required.
3 - Don't worry about costs, as a super major, BP can cope with multi-billion losses. It is self insured anyway, acting in the interests of its customers rather than shareholders is the way to go in this situation.

BP's share price is under huge pressure after the failure of the top kill method for blocking the well. With all that is going on it can't be a good time to buy yet; also the dividend is going to take a big hit from all the costs of dealing with the above. That said, as a Super Major BP will be back, if it starts to touch its bear market lows of under £3.90 per share then it will be worth a look for the long-term - that is just 10% down from where it is now.


Jonathan said...

Yep, Hayward will have to go to assuage the mob although they are best to wait until they just about have the situation under control and then the new guy can come in as the conquering hero.

Incidentally, BP have been sending emails round to the major unis asking for off the wall advice on how to stop the leak.

CityUnslicker said...

every little helps. A dark situation at the moment that they really don't know how to fix.

There will be a long reflection on drilling for oil this deep that will affect other companies that do such deep drilling offshore.

Nick Drew said...

great post CU - if Mandy doesn't get Hayward's job you are in with a shout

bit of a discussion on Alphaville re: whether this all makes BP a takeover target

I say Exxon has no idea how to value it - BP's prop trading is on such a vast scale and Exxon has no feel for this at all

will affect other companies that do such deep drilling offshore - incidentally, quite a reflection on global economic weakness that this hasn't caused oil price to go up

Timbo614 said...

A question / thinking out load:

Have BP/Hayward asked OTHER major oil companies for help?

I have not seen it reported. BP should do this publicly to demonstrate that they are not protecting their interest in the oil above all other considerations... being humble, saying "look - we are asking our competitors to chip in at our expense"

Could that be their way out - spread the blame / consequences over the industry as a whole?

Anonymous said...

I did some browsing about this and found this
A grim report circulating in the Kremlin today written by Russia’s Northern Fleet is reporting that the United States has ordered a complete media blackout over North Korea’s torpedoing of the giant Deepwater Horizon oil platform owned by the World’s largest offshore drilling contractor Transocean that was built and financed by South Korea’s Hyundai Heavy Industries Co. Ltd., that has caused great loss of life, untold billions in economic damage to the South Korean economy, and an environmental catastrophe to the United States.
Russian Navy atomic experts in these reports state that should Obama choose the “nuclear option” the most viable weapon at his disposal is the United States B83 (Mk-83) strategic thermonuclear bomb having a variable yield (Low Kiloton Range to 1,200 Kilotons) which with its 12 foot length and 18 inch diameter, and weighing just over 2,400 pounds, is readily able to be deployed and detonated by a remote controlled mini-sub.

CityUnslicker said...

Anon - what a great spot. That is hilarious. Of course Obama will choose the nuclear option!

Budgie said...

I got the impression that Obama was anti Brit before this disaster, now he certainly is. He is not alone in America.

The reaction would have been different if the owner was Exxon rather than BP. It is a mistake to think that nations do not matter.

mark said...

You advise BP to be 'honest'. Unfortunately in the current corporate environment honesty and integrity are not usually rewarded. In fact they are often brutally punished.

If BP were to be totally honest what would happen?

- they would be at an immediate disadvantage in any litigation with contractors. the contractors will continue to play hard-ball and BP will be left to carry all of the can.

- the regulators will jump on any email or statement by any engineer or company official at any time with a "gotcha" type zeal. This discourages genuine attempts by BP employees to identify and discuss problems as this will be seen as an admission of liability. The regulators will jump on any honesty by BP as a way of diverting attention away from their failures.

- this is now potentially a criminal probe. it is very hard to get someone to be honest when their honesty may potentially incriminate them.

- honesty on an individual employee level could see you disproportionately blamed for any problem - i.e. set up as a patsy.

Integrity works best when those around you act likewise.

CityUnslicker said...

Mark - and the opposite is also true, further lying and obsfucation will not result in a better outcome - you are assuming lying works.

Anonymous said...

@CU 'further lying' ?? what's to lie about ? obsfucation, hmmm maybe. What is true is America continues to need oil.

Steven_L said...

Thanks for your thoughts on this CU.

I've been watching these US news bulletins you get on Sky/News 24. Every night BP, BP and BP.

If this does go on for months I reckon the US voter is going to get angry.

So what I've been wondering is what happens if all that anger is directed not at BP, but at OIL.

Will the US love affair with oil continue if their costal communities get drenched in the stuff?

Anonymous said...

it seems US policy to one of the worlds biggest companies and to its biggest ally is governed by what the Presidents daughter shouts through the bathroom door.

Andrew B said...

Robert Reich reported to be calling for the temporary nationalisation of BP on Today because

'BP is a private company - in that it is publicly owned and run for the benefit of its shareholders, rather than the citizens of the US, which is different'

Ho hum

I personally think the chances of this happening are low->0, but if it does, great for BP as from that point BP can sit back and criticise and redirect lawsuits at the US Govt.

James Higham said...

I'd appreciate your comments on gold, CUS and if you don't mind, will transfer them to the post on gold.