HOUSTON – BP is planning to split its U.S. onshore oil and gas segment into a separate business by next year, a bid to become more competitive with smaller rivals that dominate the region’s shale reservoirs, executives said Tuesday.
The move would install a new management team to oversee about 7.6 billion barrels of BP’s oil and gas resources across 5.5 million acres in the Eagle Ford Shale in South Texas, natural gas-rich regions in Oklahoma and Arkansas and elsewhere.
“With the rapidly evolving environment, our business has become less competitive,” BP CEO Bob Dudley told investors in a conference call early Tuesday. The new business “will have separate governance, processes and systems designed to improve the competitiveness of its portfolio.”
The splintered company still would be owned by BP, which will start to disclose separate financial statements for the new business in 2015. But it would operate from an independent location in Houston separate from its North American headquarters on Westlake Park Boulevard in Houston.
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BP, he said, decided it could greatly improve its performance in the U.S. shale plays after studying how competitive it is in the region. In recent years, he said, BP has slashed several positions in the U.S. and added a footprint in shale reservoirs.
Crafting a sharper edge against the slew of independent oil producers operating in the major shale plays will require improving its drilling and production speed, more efficient cost management and faster decision making, BP Upstream CEO Lamar McKay said during the call.
“The unique competitive environment in the lower 48 requires speed of innovation,” McKay said.
McKay cited BP’s operations in the Eagle Ford as one of its stronger U.S. regions. The London-based oil giant harvested more 500 million cubic feet of gas per day within three years of launching a joint venture there with Lewis Energy, he said.
McKay told analysts that BP is looking to build a more successful business, not improve it to sell it off. Separating the business could make it clear how much its U.S. operations are worth, he said.
The U.S. business has operated on less than 5 percent of BP’s capital expenditures in recent years, McKay said.
The move comes as BP trims billions in assets and spending across its global operations, an effort to collect more cash and increase distributions to investors, who have expressed skepticism that giant integrated oil companies can deliver adequate returns, Dudley said.
The company has sold $38 billion in assets over the past two years — about a third of its divestitures over the past decade — in large part to recover from escalating legal and cleanup costs of the 2010 Gulf of Mexico oil spill.
In the merger and acquisition market, BP is seeing strong bids for assets it plans to sell, but it will not be in the market to buy oil and gas operations until its balance sheet builds up greater strength, Dudley told analysts Tuesday.
“I think it would confuse investors to talk about mergers,” Dudley said. “It’s not the right time to plan along those lines.”
Since April 2010, the month of the offshore disaster that killed 11 workers and spilled millions of barrels of oil into the ocean, BP has retained 65 percent of its operated wells, half of its pipelines and 88 percent of its reserves, Dudley said.
“BP is a smaller and simpler company now,” he said, adding that it is putting much of its resources behind offshore operations in four key areas, Angola off the coast of Africa, the Gulf of Mexico, Azerbaijan and the North Sea close to Norway.
And even as BP negotiates with federal regulators, it has significant room to grow its operations in the Gulf, McKay said. Only 20 percent of its operated resource base in the Gulf has been produced. It currently has 10 operated rigs running in the region.
The company is also running 60 programs to constrain spending, including consolidating back-office functions such as accounting and brand management. BP is planning to continue its divestiture program with another $10 billion in sales by the end of 2015, trading older assets with low cash flow for the ability to reinvest in high-return projects, he said.
The company will likely spend $24 billion to $25 billion this year, and retain that investment level each year from 2015 to 2018. Cutting costs and assets has boosted BP’s free cash to $31 billion this year, up 50 percent since 2011, BP Chief Financial Officer Brian Gilvary said during the call.
One big driver of free cash flow was that it has made progress paying off a $20 billion trust fund for parties injured in the 2010 oil spill. There is about $6.8 billion left to be dispersed, Gilvary said.
On Monday, a federal appellate court in New Orleans ruled that BP would have to bear the original terms of the multibillion-dollar oil spill settlement it agreed to two years ago.
BP had begun legal fights last year over what it believes is a misinterpretation of the settlement, which does not require oil spill claimants to prove that the spill caused economic losses, but rather relies on a geographical framework of judging how close a claimant was to the spill.
Dudley said BP disagrees with the order and is planning to bring the question before the entire U.S. Fifth Circuit Court in New Orleans.
“We remain committed to paying legitimate claims,” Dudley said. The company’s balance sheet, he said, is prepared for the continued trouble.
BP shares rose 22 cents to $49.22 in early trading Tuesday on the New York Stock Exchange.
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