Spill-related legal costs, lower than expected oil prices and high tax rates have pushed BP into lower second-quarter earnings than anticipated, as the British oil company still struggles to resolve the aftermath of the 2010 Gulf of Mexico disaster.
The company announced earnings of $2 billion for the second quarter, down from $16.8 billion for the first quarter 2013, but up from the $1.5 billion loss for the same time last year. Company officials say that key projects, a successful completion of its capital disposition plan and revenue growth put it in a strong position going forward. Total revenue was $94.7 billion, roughly equal to $94.9 billion for the same period last year.
“Overall, I think the company is moving just right in the direction towards 2014 that we always said it would,” said Bob Dudley, CEO of BP. “We are seeing growth in production from new high-margin projects and are making good progress in exploration and project delivery.”
Public appeal: BP mounts heavy media campaign as judge weighs spill case
The company used the second quarter to demonstrate that it sees its future as all about exploration. It invested in 16 new exploration license blocks that ranged from Brazil to Norway’s Barents Sea to the South China Sea. It is actively drilling 11 exploration wells, and has begun producing two upstream projects in the quarter, the Gulf of Mexico’s Atlantis project and its Angola LNG project. It also made significant natural gas discoveries in India.
The company also has completed its $38 billion asset sale program well before its 2014 deadline, Dudley said, noting that the company plans to continue its active portfolio management program. It spent $5.8 billion on capital projects last quarter and intends to divest of about $2 billion to $3 billion each quarter.
“I think if we wanted to, we could spend $30 billion on good major projects. But what we have decided to do is to make sure that is not the path we go down,” Dudley said. “We have a very disciplined cap ex program. This is the benefit of having lots of things in the portfolio.”
BP sold its half of the TNK-BP joint venture last fall in exchange for 20 percent ownership of state-owned Rosneft, an investment that the company is hoping to leverage into further value creation, Dudley said.
“This is the time to work with Rosneft and find things that are mutually beneficial,” Dudley said, noting that BP believes it can add the most value by working with the Russian oil company on tight oil and various projects globally. “I think I would stay tuned and let’s see what happens.”
Gulf oil spill: BP not expecting spill settlement
The results come as the British oil giant continues to eye growing litigation costs with unease.
BP estimates that its $20 billion fund for Gulf of Mexico-related costs will soon run out, estimating that it will have spent $19.7 billion of the fund by the end of the second quarter and will be making additional charges to its income statement for subsequent periods.
The company announced Tuesday that it had raised its estimate of the cost of the claims process by $1.4 billion to $9.6 billion, as more claims have come in. It also increased the accident’s cost to $42.4 billion and made it clear that it intends to vigorously challenge any claims it believes are fraudulent, if it wins the appeal it has filed with an appeals court. It recently lost a request to temporarily stop payments to claims recipients that it argued were unjustified.
“There is clearly a lot of uncertainty in being able to recover those claims, but in the event we get a favorable ruling, we will go after the big, substantial claims,” said Brian Gilvary, chief financial officer, adding that the threshold for pursuing questionable claims would be about $25,000.
Dudley said that claims process could be a cautionary tale for other companies facing industrial accident litigation.
“We were following the principle that after an industrial accident you should do the right thing, and that we should be a good corporate citizen everywhere we work,” Dudley said. “Going down that path, we feel we have been taken advantage of, and I think this could be an example for large companies, that instead of focusing on doing the right thing, that what you should do is lawyer up.”
BP chief: Oil spill settlement has been ‘hijacked’
But legal experts point out that BP already had a sizeable looming liability under the Oil Pollution Act, which requires operators to compensate damage claims for any damage or injury to property or natural resources.
“Any individual or business that can show a decline in their revenue as a direct result of the oil spill could have filed a claim under the Oil Pollution Act,” said Blaine LeCesne, a torts law professor at Loyola University who has followed the case closely.
The March 2012 settlement resolved hundreds of thousands of claims that BP would have held liable for, possibly at a much higher cost, if punitive damages were applied, LeCesne said.
“That’s why they did it – it would cost less than the litigation under the Oil Pollution Act,” LeCesne said. “That estimate was nothing more than wishful thinking. Their failing was in not capping the settlement. If they were concerned about the costs, they should have put a cap on it.”
Dudley indicated that the company is prepared for a long litigation slog, especially in resolving the economic claims.
“There are lots of examples of companies where legal activity rumbles along for long periods of time,” Dudley said “It is not what we wanted but we are organized to be able to deal with it.”