WTI $97.84 +1.48 ; Brent $114.28 +2.31 ; Natural Gas $2.50 -6c
The oil price remains steady, indeed Brent is particularly high compared to WTI with the differential stretching to $16.44 as predicted a short while ago. The general firmness is due to better employment figures from the US on Friday as well as continued tension around Iran with publication in the states of a paper suggesting that ‘ the bomb’ will be ready in six months.
It’s a quiet Monday morning so having spent the last 100 or more days counting down to the BP results and the more important annual strategy announcement it may be worth making a few comments about the background.
After the trauma that was Macondo, BP hunkered down and prepared for the future, a future that needed immediate cash and a change in outlook, unique amongst the super-majors it had a restructuring forced upon it. Tomorrow the company will deliver its results for 2011 and the market will find out how it intends to tackle the substantial corporate challenges ahead. Some difficult decisions have to be made and the question is, are BP prepared to do what its shareholders expect of it?
Asset sales and a long spell in court
BP set themselves a task of selling up to $45bn worth of assets, a number subsequently reduced to $38bn after the sale of $7bn worth of Argentinian assets fell through in November last year. After that the company claimed to be less in need of the cash after a decent turn round in its fortunes and a fair wind from the oil price post the Arab Spring and the Libyan Civil War. The challenge in the short term however remains a Macondo hangover, and with its court case starting on February 27th pre submissions have been mixed at best, many observers believe an out of court settlement should be taken at all costs.
The longer term is another challenge, BP still has an exceptionally good portfolio of assets in the Gulf of Mexico and this will be at the forefront of the ‘new’ BP along with TNK-BP, which ranks along with the best investments made in many years. Elsewhere the company has vowed to invest in its core strengths, in deepwater, frontier acreage and has invested in such areas as Iraq, Angola, Indonesia and of course in the UK. Efforts to invest in the Arctic with Rosneft showed the BP management at its worst, a badly thought through plan that backfired and embarrassed the company and handed the assets to Exxon on a plate. BP still operates in too many countries so expect rationalisation and further asset sales for the foreseeable future.
BP has to decide what to do with its downstream assets. It appears to have fallen in love with a business that worldwide is suffering from a surfeit of capacity and a fall in margins, so much so that other players are still rationalising old plant. To follow Marathon and ConocoPhillips in demerging refining and marketing has been mooted but word from BP is that for them it would be too difficult, complicated and unfeasible, however if the division isn’t in a good enough state to stand alone something needs fixing. Readers of the blog over a long period of time will know that this is has been a bug bear of mine for ages and still is, I still wish to hear the words ‘get me the CEO of Valero on the line please’.
BP has said that with a growing cash flow it will share the money between capex and returning money to the shareholders and thus speculation exists that they will restore the dividend to pre-Macondo levels next week. However if Macondo did one thing it gave BP a chance to cut a pay-out that most agreed had got too high, compromising capex elsewhere, it would appear to be bordering on the irresponsible to return to old fashioned dividend profligacy. Indeed Shell in its recent results announced a 2.3% increase in its dividend, the first for three years and justified its parsimony by reminding analysts that capex is about investing through the cycle and that includes dividends.
Non-Executive changes, light at the end of the tunnel
On Friday BP announced some non-executive Board changes which are of some importance. Sir William Castell has left the board after a very difficult time post Macondo and who can blame him for calling it a day. Interestingly the change which the City will find most important is the announcement that the new Senior Independent Director is to be Andrew Shilston who has only just joined the Board. Andrew was the CFO of Enterprise Oil before it was taken over by Shell and until recently CFO at Rolls Royce, his appointment should be cheered from the rafters as for the first time in recent years shareholders have somebody at Board level that has their interests at heart. The press release from the company actually says that Andrew will be available to shareholders as necessary which is the first time I have ever seen that.
The challenges that face BP are different, but no less significant than for other companies in the sector, for them the problem may be coming to terms with the fact that its days of being a super-major are in the past as the down-sizing of BP becomes inevitable. Doing nothing is not an option at this stage and it will be fascinating to see what the plans are. We turned buyers of BP at 370p last year predicated on the view that things had got so bad that it was good, the upside to the asset value substantial and downside limited, we remain of the view that despite being up nearly 30% from then that there is more to come, bring on Andrew Shilston!
Only two other pieces of company news today, Premier has been ‘disappointed’ by the findings of the East Fyne appraisal well and will now be part of the work being done to decide on whether the area is a potential commercial development there with a conclusion expected by the end of 2Q 2012.
Afren has announced that Eni have spudded their offshore Ghana exploration well, Afren has 35% of this block.
Today’s and finally is a brief roundup of weekend news starting with a fantastic evening on Friday at the Scottish Oil Club Dinner where one should say that Bob Keiller of Wood Group PSN made an outstanding speech as principle guest.
The other pieces of news are mainly about the rugby at Murrayfield which England won and in Dublin where Ireland snatched defeat from the jaws of victory. In the Superbowl the Giants snatched victory over the Patriots.
Chelsea snatched a draw after being 3-0 up and the Gooners went 7-up!
I am saving up my comments on the British Airports Authority until tomorrow when I have calmed down after they spent the weekend as if they couldn’t run a whelk stall…..