Earlier this week, BP (BP) announced plans to sell up to $30 billion worth of assets over the next 18 months to help pay for the damages caused by the Deepwater Horizon oil rig explosion and spill in the Gulf of Mexico. Tony Hayward, BP's lame duck CEO, said the sale "can better align our strategic footprint with our global strengths," and that the initial capping of the oil spill "provides a firm basis for moving forward to reshape the company."
Which begs the question: What will BP look like this time next year? Will there even be a BP as we now know it? The answers to those questions rest on several variables: most notably continued asset sales, future litigation and the fate of the company's now-tattered public image.
Lawyers, Litigation and Liabilities
Matt Marshall, an energy analyst with Colorado-based Bentek, believes the final tally of BP's liability in the Gulf will be the thing to watch. "They've already been pushed toward a $20 billion escrow fund to pay out damages from there," he says, "but that's doesn't mean that its capped at $20 billion. It doesn't mean it will reach $20 billion. Time will tell see how much capital they'll have to raise from asset sales to meet that."
"If the EPA or some government entity gets involved in a lawsuit and becomes a plaintiff, that will be really bad news for BP," says Sanjai Bhagat, professor of finance at the University of Colorado (Boulder)'s Leeds School of Business. Bhagat has researched how the stock market treats lawsuits filed against companies. While he hasn't examined BP's situation per se, "generally what you find is when the plaintiff is a government agency, the decline in the market value of the defendant's stock is much more significant than if the plaintiffs were individuals."
Both men agree BP will be a much leaner company by the summer of 2011. "I would expect that they would follow the signs they've given us so far, " says Marshall, "That means selling some assets -- probably the ones that could be overvalued -- but also the stuff they would consider noncore; assets that are not central to their strategy moving forward. BP is trying to play a balancing game right now, between raising money from asset sales and also holding on to assets that look attractive."
Time to Sell. But What?
According to Bhagat, BP might spin off its alternative energy assets -- separating its traditional energy and renewable energy divisions. "Spinning off of divisions, of assets by companies, is not new," he says. "Usually, when a company announces a spin off, the stock market appreciates the announcement because it shows the company acknowledges that it can only do so many things well. If that's why BP spins off some businesses, it may be good news [for shareholders] and for claimants along the Gulf who are going to be involved in litigation. BP has to make an internal assessment as to how many separate divisions they can run efficiently."
Fallout from the Deepwater Horizon spill and the possibility of a sustained government moratorium on off-shore drilling will most likely prompt BP to look at more onshore development in places "where the risk of development is less, like Oklahoma, San Juan [basin in southwest Colorado], and the Rockies," says Marshall. "The current threat of regulation, the government and the market's opinion of their risk right now would encourage BP to move to onshore places as much as possible."
And as BP evolves in the post-oil spill environment, it will have to focus on making amends with the public -- particularly in light of the company's checkered operations record. "I think BP's senior management may get more focused on managing things competently, rather than just running it," says Bhagat. "Their lack of attention to safety and mechanical competence issues. It's not trivial to drill a mile below sea level. If they're wise, they will focus on basic competence."
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