The Great Debate UK

from Breakingviews:

BP should be back on bid alert

By Fiona Maharg Bravo and Christopher Swann The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

MADRID/NEW YORK -- BP has the hallmarks of a bid target -- a discount share price, a strategic setback and weakened management. Almost a year since the Gulf of Mexico spill hobbled the company on its Western front, the UK oil major has got bogged down in Russia, leaving it exposed again.

Adjusting for the gain in global stock markets, BP's $146 billion market value is $75 billion below where it was before the Gulf spill. Even if BP was found to be grossly negligent, the post-tax bill would add up to just under $50 billion. The problems in Russia, which account for about 10 percent of BP's profits, justify some additional discount. An arbitration court ruled that BP's proposed drilling alliance with oil giant Rosneft breached the terms of its existing Russian joint venture with TNK-BP. Any resolution of the spat will be complex and potentially costly -- whether it involves buying off its partners in cash or perhaps even BP equity.

That BP could have got itself into a row with TNK-BP -- the pair fell out in 2008 -- is bad enough. But it's especially serious given the chief executive, Bob Dudley, used to lead the venture. Worse, BP is talking about swapping 5 percent of its equity for a stake in Rosneft even if TNK-BP succeeds in blocking the drilling alliance outright. There is little justification for issuing stock to a Russian state-backed group with no tangible benefit.

Ultra-cautious Shell would not make a hostile offer, and BP's management is focused on pursuing its "shrink to grow" strategy. But Exxon must be tempted to exploit the situation. The cost savings in its 1998 Mobil deal were about 10 percent of combined operating expenses. On that basis, the savings from an Exxon-BP combination would be $12 billion a year. The industry has cut some fat in the last decade, so perhaps $10 billion is more realistic. This would be worth around $70 billion. That's enough to fund a $45 billion, or 30 percent, premium for BP shareholders, while leaving headroom for potential costly resolutions in the Gulf of Mexico and Russia.

Yet a deal still looks complicated. Antitrust regulators would probably force Exxon and BP to sell U.S. refining and marketing activities, and that's not exactly a seller's market. The Macondo fiasco is still a big headache, and there is not yet a solution in Russia. And then there are the political challenges in an assault on Britain's national oil champion. If Exxon made a move, Shell might be drawn in as a white knight.

Few expect a deal to happen in the short term. But the longer BP's shares languish, the more the financial logic of a deal could tempt Exxon to overlook the snags. For BP's board, the biggest test may be yet to come.

from Breakingviews:

BP’s PR sludge keeps flowing with new book

BP may have felt the public relations tide was turning in its favor. Probes into its Gulf of Mexico spill have so far unearthed no direct proof that a culture of corner-cutting at BP caused the disaster and investigators have even spread part of the blame to the firm's contractors. But the reprieve may be cut short by writer Loren Steffy's deeply critical history: "Drowning in Oil: BP and the Reckless Pursuit of Profit."

Like the financial crisis, BP's record-breaking oil spill is sure to spawn a shelf full of books. Steffy's readable account has surfaced before the release of much important evidence relating to BP's greatest mishap. Still, the author makes a convincing case that the Macondo blunder can be traced to a longstanding BP culture of neglecting safety.

For the American public, Tony Hayward will forever be the public face of the spill. And the displaced BP chief does not escape criticism in Steffy's account. But it is Hayward's predecessor John Browne who emerges as the true source of BP's serial lapses. When Browne took the helm at BP in 1995 the once grand company had become the "stepchild" of the "Seven Sisters," as the world's largest integrated oil companies were known.

Through a spree of takeovers—including Amoco and Arco—Browne succeeded in catapulting BP up the ranks of major oil producers. Yet rather than adopt the safety-first culture of Arco, Browne launched a "relentless" war on costs. Popular as this was with shareholders, it stored up future problems. By the time of the 2005 Texas City refinery explosion—which killed 15—"Browne's cobbled together business empire was warping and buckling like a cheap coffee table left in the rain," Steffy argues.

Penny-pinching, he contends, was at the root of each of BP's high-profile accidents. Just a year before the Texas City accident, London headquarters had ordered refineries to cut costs by a quarter. Displaying a "pugilistic attitude" to expenses, Browne shunted much of the refinery staff off the company's payroll and neglected training and repairs. Investigations into the blast revealed that BP managers had known a key piece of safety equipment wasn't working and yet had put off repairs. This cavalier approach to safety was mirrored in BP's pipeline and exploration operations, Steffy argues. After BP's Prudhoe Bay oil spill in 2006—the largest on Alaska's North Slope to date—it was revealed that 16 miles of pipes had corroded and posed a serious threat of leaking.

Despite this evidence, Browne and his managers refused to acknowledge the possibility that cost cuts played a role in either incident. Indeed, in an internal report after the Texas City disaster BP pointed the finger at bumbling workers rather than poorly maintained equipment. Echoes of this blame-shifting can also be found in BP's response to the Macondo spill.

A stubborn unwillingness to link costs and safety was also Hayward's great failure, Steffy suggests. The new chief initially made good on his promises to focus "like a laser" on preventing accidents, hiring 1,000 new engineers and investing $1 billion in the Texas City refinery. Yet he still clung to the mantra that budget cuts did not contribute to BP's refinery explosion or the Alaska spill. And as oil prices plunged in 2009, Hayward too slashed $4 billion in expenses.

from Breakingviews:

BP’s second kitchen-sinking can’t mask comeback

It will be a long time before BP is back to business as usual following the Gulf of Mexico disaster. The UK oil and gas major has just upped its estimate of costs by $7.7 billion to $39.9 billion, in what investors must hope is the second kitchen-sinking exercise following the disaster—albeit the first under new chief executive Bob Dudley. But the hit can't mask what looks like the makings of BP's recovery.

The upward revision to the spill cost was twice as big as some analysts had expected—BP blamed delays in capping its leaking well—but the shares still rose on the news. That isn't so strange. The Gulf of Mexico disaster has already wiped some $60 billion from BP's market value, while global markets are little changed from when the Macondo well blew out in April. After tax, the hit falls to $27 billion. That number is still probably a best guess. A gross negligence charge for BP would send the bill skyrocketing. Equally, the costs could fall if BP's partners in the stricken well end up assuming their 35 percent share of the liability.

Excluding spill costs and other one-offs, underlying quarterly profits were up 18 percent to $5.5 billion, well ahead of forecasts. A lower effective tax rate helped, but refining margins were also higher. Still, BP still lags rivals. Production fell 4 percent in the quarter, against a 5 percent rise at Shell. It will slide further as BP continues to sell assets to fund the spill bill.

Meanwhile, the balance sheet looks strong. Net debt rose slightly in the quarter to $26.4 billion, leaving gearing at 23 percent. Adjusting for cash deposits received on disposals not completed by the quarter end, gearing would have been only 19 percent, according to Collins Stewart estimates. As BP acknowledges, the strength of its cash flow will permit an increase in capital expenditure next year. Depending on how the gross negligence question is resolved, the dividend could be reinstated in 2011, too.

Dudley has his work cut out to rebuild BP's reputation and safety culture in the wake of the Macondo crisis. Still, it's easy to see how he could preside over an improvement from here.

from Breakingviews:

BP assets worth risk of indigestion for Apache

It's potentially hazardous to swallow a meal a third your size. But it could make sense for Apache to grab $10 billion of BP's Alaskan assets. The U.S. firm's flair for squeezing oil from older wells makes it an ideal buyer -- and BP is a keener seller than it was.

With a market capitalization just shy of $30 billion and only $2 billion in cash on hand, Apache might not find it easy to digest a big deal. Nor is it coming to the table with an empty stomach. Just days before BP's Gulf of Mexico rig explosion in April, Apache snapped up Mariner Energy for $2.7 billion and bought $1 billion of assets from Devon Energy.

As yet there's no certainty about any deal. But if Apache spent $10 billion and funded the purchase entirely with debt, it would raise the company's ratio of debt to total capital sharply -- towards 50 percent from around 25 percent currently.

Even so, it would not break the bank, especially if combined with issuing new equity. Apache's focus on late-stage assets gives it strong cashflow to help pay down debt quickly -- some $7 billion this year and $8 billion next, by Tudor Pickering Holt estimates.

A degree of managerial and financial discomfort is worth suffering. BP's giant wells in Alaska are past their prime, with production ebbing. That's right in Apache's sweet spot, and the company is well placed to give them a last lease of life.

Then there's the timing. Apache doesn't quite have BP over a barrel -- the British firm has cash on hand and other assets it could sell. But BP will want to deliver on its promise to offload assets to help fund the Gulf clean-up. Even vague talk of a deal with Apache helped boost its battered shares.

By contrast, Apache's stock fell 4 percent on Monday morning. Investors can be forgiven for worrying that the company bosses' eyes may be bigger than their stomachs. But with BP a motivated seller it may be as good an opportunity as any to secure a bargain.

The added value of the MBA in promoting sustainability

-Lindsey Nefesh-Clarke is the founder of Women’s Worldwide Web – an online charitable organisation designed to help empower women with access to micro-finance loans, education, mentoring and networking. The opinions expressed are her own.-

“To reach a tipping point towards a new era of sustainability”: this is the urgent goal of the business, government and civil society leaders who convened in New York City for the recent U.N. Global Compact Leaders Summit.

In its effort to mobilize the global corporate community around the values and best practices of corporate responsibility, this gathering could not have been more timely.

The world is still suffering the fallout of the worst financial crisis since the Great Depression.  In addition to wreaking far-reaching damage in high-income countries, the financial crisis has had an egregious effect on child and maternal health, gender equality, access to clean water, disease control, and hunger levels worldwide.

The World Bank estimates that there will be 53 million more people in extreme poverty in 2015 than there would have been had the financial crisis not occurred.

Meanwhile, the U.S. is battling the worst environmental disaster in its history.  In the wake of BP’s Deepwater Horizon rig explosion in the Gulf of Mexico, U.N. Secretary General Ban Ki Moon managed to strike an upbeat chord in his summit address, observing that “the business community is coming to understand that principles and profits are two sides of the same coin”.

Facebook group defends “harassed” BP

BP’s chief executive Tony Hayward branded “the most hated man in America” may be surprised to find himself cast in the role of victim by a growing clan of web-based supporters on Facebook.

One such group ‘Support BP’ calls itself the defender of an “undeservedly harassed institution” and seeks to show that the public opprobrium BP faces over its now 60-day-old Gulf of Mexico oil spill is not universal.

Members have been increasingly vocal since a succession of strong rebukes of BP by U.S. President Obama and lawmakers at Thursday’s congressional hearing, which they are calling a “lynch mob”.

The outburst of sympathy follows an apology to Hayward from Texas Republican Representative Joe Barton on Thursday, later withdrawn, for having to agree to a deal with President Obama to set up a $20 billion fund for Gulf claim damages.

Some of the Facebook posts echoed this same spirit of regret: “My apologies as an American to Tony Hayward for the rude and insulting conduct as well as the rush to judgement by U.S. politicians on 16/7,” wrote George Gray, 50, from Pennsylvania, referring to Thursday’s hearing.

The bulk of the group’s posts are written by Americans.

from Global Investing:

What fund managers think

Bank of America-Merrill Lynch's monthly poll of around 200 fund managers had a few nuggets in the June version, aside from the usual mood-taking.

Gold is too expensive.  A net 27 percent of respondent thought it overvalued, up from 13 percent in May. Then again, the respondents to this poll have reckoned gold is too pricey since September 2009.

The fall in the euro should be tailing off. A net 14 percent reckon the single currency is still overvalued, but that is way down from the net 45 percent who thought so in the May poll.

BP is good for pharma. The net percentage of fund managers who remain overweight in energy stocks plunged to 7 percent in June from 37 percent in May as oil has continued to spill into the Gulf of Mexico.  The stock beneficiaries have been "dividend friendly" utilities, telecoms and pharmaceuticals.

China's growth is slowing. A net 27 percent of investors reckoned China's economy will weaken from where it is now over the next 12 months. That probably has mixed blessings given that investors both are expecting China to pull the world along the course of recovery and are worried about its economy overheating.

Overall, the poll showed fund managers to be cautious about the world economy but not giving up on riskier assets.

Steve Tappin on what makes a CEO tick

Being a CEO should be one of the best jobs in the world, argue the authors of a new book.

“It offers the chance to make a real difference,” Steve Tappin and Andrew Cave write in The New Secrets of CEOs: 200 Global Chief Executives on Leading.

“However, real life for most CEOs is tough and many are not enjoying it.”

The authors interviewed 200 CEOs for the book, which includes profiles of such leaders as Tesco’s Terry Leahy , Avon’s Andrea Jung, Xstrata’s Mick Davis, Kraft’s Irene Rosenfeld, Haier’s Zhang Ruimin and Cisco’s John Chambers.

CEOs are divided into five “distinct categories” characterised by similar leadership styles.

In the following video interview, Tappin, who heads up the CEO counselling firm Xinfu, discusses some major issues confronting top leaders at global firms since the financial crisis of 2007-2009, and shares his views with Reuters on how BP’s Tony Hayward should manage the the Gulf of Mexico oil spill crisis.

BP Gulf of Mexico crisis will transform the oil industry

-Kees Willemse is professor of off-shore engineering, Delft University.  The opinions expressed are his own.-

The news that a huge metal cap has been successfully placed over several of the leaking oil vents at the Deepwater Horizon site marks a potential turning point in the Gulf of Mexico crisis.

It is already estimated that each day some 10-15,000 barrels of the oil that are spilling out into the ocean are being captured and diverted to ships on the sea surface.

Despite this engineering success, a complete end to the oil leakage is unlikely until new relief oil wells are completed — a drilling process that could take most of the summer, and potentially into the autumn.  This is because the newly installed metal cap is unlikely, even in the best case scenario, to stop all of the oil spilling out.

In advance of the completion of the relief wells, a potentially major new complicating factor is the arrival of the hurricane season last week.

The National Oceanic and Atmospheric Administration is already predicting between 8 and 14 hurricanes this season, with perhaps a similar number of smaller storms, any of which could complicate (or indeed force a postponement) of the ongoing mitigation and clean-up activities in and around Deepwater Horizon.

from Breakingviews:

UK governance code fails at BP and Prudential

(Republished on Oct. 19 with the following disclaimer: Neil Collins owned shares in BP when he wrote this article; he bought shares shortly before and after)

BP  and Prudential are two of Britain's biggest and most respected companies. Their lavish annual reports contain dozens of pages on how these great corporations are run. Both boast of their compliance with the code of corporate governance, which encourages proper boardroom debate to avoid bad decisions, boosts the chairman, and insists that he cannot also be the chief executive, lest one person become too powerful.

At BP, a powerful chairman in the shape of Peter Sutherland was replaced in January by Carl-Henric Svanberg, who had been chief executive of Ericsson. He has been the invisible man at BP.

In normal times, this might not matter. As the company's oil pollutes the southern coastline of the United States, it's a PR disaster. In a crisis, the chairman must be seen to be supporting his chief executive. Unfortunately, Svanberg's chief executive, Tony Hayward, is not media-friendly either.

Hayward is only starting to show that he grasps the severity of the crisis facing BP. The board seems to be further behind. It should have decided to suspend dividend payments until the Macondo incident is closed, before external pressure to do so becomes irresistible.

The failure at Prudential  is a different sort of corporate disaster. Chairman Harvey McGrath has indeed stood right beside Tijane Thiam, his chief executive, throughout the doomed attempt to buy AIA, the Asian insurer.

The Pru board is full of luminaries, some of whom may even understand life insurance company accounts. Yet they allowed an untried executive team to try to pay a high price for a business the Pru couldn't afford.