BP regroups, rebuilds even as world oil market takes a dive

WASHINGTON, D.C. -- After the 2010 oil spill that killed 11 workers and sent more than 4 million barrels of crude gushing into the Gulf of Mexico, BP had to pare its portfolio around the globe and sell off $43 billion in assets, including refineries, pipelines and producing wells.

In the process, the London-based firm became a leaner company, with a slimmed-down portfolio that makes it better prepared to weather a bear oil market than some competitors just beginning similar cost-cutting.

"We're in a strong position given where we've come from and what we've already had to be doing," BP America Chairman John Minge said. "Our balance sheet is stronger, we've focused our capital program to be limited even though we have more choice than that, and when the industry goes through these kind of down dips, there are always opportunities. I think we're in a strong position relative to others."

But BP's smaller size and pared-down portfolio also make it a top target for a takeover, especially with oil prices plummeting 45 percent since June and the company's Russian investments declining in value. Trading in BP's stock briefly spiked earlier this month amid rumors that Royal Dutch Shell would make a play for the company.

Some analysts also question whether BP has cut too close to the bone, depriving itself of blockbuster growth opportunities needed to keep fueling the company, while divesting downstream assets that would have blunted its exposure to low oil prices.

Counts it as a success

But Minge, who spoke exclusively to the Houston Chronicle in his first one-on-one interview since taking the job almost two years ago, cast BP's U.S. restructuring as a success story, with the company rebounding from a devastating accident, despite ongoing litigation, billions in fines still undetermined and some sell-offs still on the horizon.

"It's a huge kind of recovery -- turnaround -- story," said Minge, who is based in Houston. "To be where we are today, four plus years after a devastating accident, and the way that we've responded, I'm proud of our employees for the resilience they've had."


To pay for mounting spill costs, Minge and other BP executives have wielded the ax with a "value over volume" strategy, shedding projects nearing the end of their lifespans or that wouldn't compete for capital within the company. For instance, last spring, BP sold interests in four Alaska oil projects, while holding on to its core asset there -- the massive Prudhoe Bay oil field, which is harboring 35 trillion cubic feet of gas.

Minge said BP's North Slope gambit is illustrative of the company's new approach.

"Alaska was a decision for us to focus ... on the biggest prize and find a way to develop the vast resources that are available," Minge said.

BP is also cutting staff, including back-office corporate workers and midlevel supervisors around the globe -- part of ongoing work to simplify operations and boost efficiency. Although savings are expected over time, in the short term the cuts will translate to $1 billion in restructuring charges.

Sold before prices fell

Of the company's $43 billion in asset sales since the spill, the initial $40 billion came while oil prices were relatively high. Fadel Gheit, an analyst with Oppenheimer & Co., noted that proceeds from that first round of sales exceeded forecasts.

"BP benefited from strong oil prices over the last four years," he said.

But now, with oil prices at five-year lows, BP is just one-third of the way toward its latest goal: shedding another $10 billion by 2016. Minge said future sell-offs are not a sure thing.

"With oil prices going down, if we don't get fair value, then we could reconsider that," he said.

Even so, the restructuring already completed leaves BP with what Minge described as "a more focused, smaller portfolio, where a lot of risk has been removed."

"It's the highest quality stuff," he said. "We're set up well for the future, whether high oil prices or low oil prices."

Deep cutting

Analysts say BP had to cut much deeper than it ever intended -- far beyond the streamlining that other super-majors now are touting as their strategy for surviving low crude prices.

"You get in a fire sale mode like they were in, I'm sure they sold some assets they never envisioned selling," said Brian Youngberg, a senior energy analyst with Edward Jones. "They can deliver on growth over time, but they would be better positioned if they hadn't had to sell as much as they did."

The risks for BP also are more acute in a low-oil-price environment, because of the ongoing uncertainty over its spill liability and its 2012 investment in Russia's Rosneft, which has lost half its value amid the price slide and Western sanctions over Russia's actions in Ukraine.

Those factors leave BP less room for error, Youngberg said.

More of its cash flow is dependent on upstream production, especially after the sell-off of some downstream refining operations and pipelines.

"The collapse in oil prices hurts all oil producers, but they hurt BP more than others," Oppenheimer's Gheit said. "While other integrated oil companies are suffering from low oil prices and some from exposure to Russia, BP has both, plus the potential large oil spill liabilities. BP also has a much higher debt ratio than most of its peers."

Big value in the Gulf

The brightest spot for the company may be the Gulf of Mexico, where BP is the largest leaseholder, has four production hubs and is running 10 drilling rigs. It is the company's most prized U.S. asset, full of high-margin barrels and deep-water discoveries that have yet to be produced.


And, while BP's global oil and natural gas production slid 19.2 percent and its U.S. production dropped 41 percent from 2009 to 2013, the company is posting gains in the Gulf.

BP is now pulling more than 250,000 barrels per day from the basin, compared to 189,000 barrels of oil equivalent per day in 2013. CEO Bob Dudley has attributed the uptick to three major project startups, five new wells coming online and improved operating efficiency.

BP executives hope to grow operating cash flow by focusing on higher-margin barrels -- like the crude it pulls out of the Gulf -- and aim to capitalize on the company's deep-water expertise.

During a presentation to investors and analysts on Wednesday, BP's chief upstream executive, Lamar McKay, highlighted the potential for 900,000 barrels of oil equivalent per day in net new production by 2020, with much of it coming from the Gulf and half of it already under construction.

Minge noted that less than 20 percent of the reserves around the BP-operated hubs in the Gulf have been harvested, leaving opportunities for more production.

BP also is investing in gas projects that are somewhat insulated from big swings in oil prices, such as an Alaska endeavor that would export liquefied natural gas from Prudhoe Bay.

And it is in the final stages of spinning off a business focused on tight oil development in the continental United States. The aim of that new venture, which will still be part of the BP group, is to be more nimble -- more like an upstart independent than a slow-moving super major -- when it comes to harvesting oil and gas from dense rock formations across the United States.

Spill effects linger

The 2010 oil spill casts a long shadow over all of BP's work, partly because of the company's decision to battle some claims paid out under its 2012 class action settlement with victims of the disaster and challenge the way the government assesses a Clean Water Act penalty. Last week, the Supreme Court refused to hear BP's claims that some claimants who are winning payments under the settlement were not financially harmed by the spill.


"In the aftermath of the accident, we absolutely all tried to put it behind us; we did a couple settlements and those did not go as well as they could," Minge said. "We had to stand up and fight back; it was work that needed to be done."

'Our future is great'

Minge, a former driller for BP, said he hopes the company is judged by its performance over time.

"We are a good solid company that had a bad accident," Minge said.

"Our future is great and we're more committed, we are safer, we are stronger than we have ever been," he said. "How other people see us, I can't control that. All we can control is what we do going forward, how we do our business, how we show up, how we get back in the community. That to me is more important."