BP PLC is selling off more assets and resuming quarterly distributions as it readies itself for a post-spill future increasingly oriented toward fast-rising Asian demand and new production in places like Canada.
The company, which saw the explosion of its Macondo well create a $4.9-billion (U.S.) loss in 2010, is shedding refineries – including the Texas City facility that produced its first major safety black mark – and reinstating its dividend.
The moves come as BP works to regain favour among investors and reposition itself as a smaller company with a narrower focus on the most promising growth markets. BP is working to step beyond the tragedies that have scarred its performance and reputation – both the Gulf of Mexico spill last summer, and the 2005 Texas City explosion that killed 15.
“Often the response to tragedy defines the character of an organization and I am determined we will emerge from this episode as a company that is safer, stronger and more sustainable, more trusted and more valuable,” company chief executive officer Bob Dudley pledged to shareholders Tuesday.
The new quarterly dividend, at 7 cents per share, will cost the company about $5-billion a year, or roughly half the level it paid before it halted distributions last summer amid the political furor and financial uncertainty of the Gulf of Mexico spill. The company has taken a $41-billion charge to pay for the spill, including $17.7-billion in cash costs in 2010 alone, and launched a $30-billion asset sale program.
But the new dividend – which produces a 3.5-per-cent yield at current share value, a higher rate than Exxon Mobil Corp., Chevron Corp. and ConocoPhillips – may be simply a start for a company that continues to produce great volumes of profit.
“What it does is provide a significant amount of running room to grow the dividend over time,” said Pavel Molchanov, an analyst with Raymond James. “I would not be surprised if there is a dividend increase before the end of the year, in fact.”
BP’s ability to maintain that cash out-flow will, however, depend largely on its ability to place the company in position to profit from global crude trends. Oil prices have climbed sharply in recent months on strong demand and tight supply, and strengthened this week amid protests in Egypt and political tension in the Middle East.
BP has already made substantial moves into the Arctic, with major deals to gain access to high-latitude reserves in both Canada and Russia. Now it has made public plans to sell half its U.S. refining output by 2012, divesting itself of Texas City, Tex., and Carson, Calif.-based facilities.
In part, the move reflects an industry trend to divest refineries. Numerous other major companies – including Chevron, ConocoPhillips and Marathon Oil Corp. – are pursuing similar divestitures.
“The logic is that in BP’s view, and we would agree with this, the global refining complex is likely to suffer from over-capacity for many years to come,” said Mr. Molchanov. He believes the most likely buyer would be an international player looking for a strategic “footprint in the world’s largest economy.”
But BP and other refinery sellers are also betting on the geography of crude production and demand growth in coming decades – and that means abandoning the U.S., where fuel use is expected to stagnate.
“Today's China demand for energy is already larger than that of the EU and is about the same size as the U.S.,” Mr. Dudley said Tuesday. He pointed out that Chinese demand is expected to nearly double in the next 20 years. “This picture requires us to think different.”
Part of that involves betting on Canada. The company is holding on to refineries in the U.S. Midwest that process Canadian crude, an increasingly important, and growing, part of the U.S. crude mix.
In fact, the company now places Canada amid several regions that it says have “significant potential to grow” in the coming decades. Others are North Africa, the Middle East and Brazil.
The company is embarking on a strategy similar to that of ConocoPhillips, which is “shrinking to grow,” said Phil Weiss, an analyst with Argus Research Corp.
One question, however, is how the company will grow in the U.S. Gulf Coast, which remains a major part of its future planning. Memories of the spill are still fresh, especially among U.S. politicians who have the ability to constrain BP’s ability to operate in Gulf waters.
BP executives “express a lot of confidence that they’re ultimately going to be allowed to return to work,” Mr. Weiss said. “But I still harbour some concerns that there would be some limitations placed upon their ability to do work there. You can tell me all that you want about this focus on safety and everything else, but we need to see tangible evidence, and tangible evidence is not something we’re going to see overnight.”