) -- Analysts had plenty of issues to raise with BP on its Tuesday morning earnings conference call, from discussion of the oil company's $32.2 billion charge taken in the second quarter to cover oil spill liabilities, to its plans to sell $30 billion in assets and reduce net debt as part of a leaner BP following the events in the Gulf of Mexico.
>>BP Takes $32 Billion Charge: Hayward Out
The following are 5 burning questions from the BP earnings call.
Question No. 1: Where does BP's internal review of the Macondo well accident stand and when will the public get a glimpse of it?
Outgoing BP CEO Tony Hayward said the investigation is at an "interim stage" and BP plans to make its interim report available to public by the end of August.
Questions about BP's review of the events leading up the oil spill also gave Hayward the chance to again defend BP against charges that it should bear the full cost of the oil spill liabilities -- it has billed its partner companies, including
, more than $1.4 billion so far, which Anadarko has contested.
Hayward stressed the interim nature of the report due to lack of access to the failed blowout preventer, as well as
personnel and records. There has been "a lack of access to some critical elements," Hayward said.
In the earnings press release, Hayward made a statement that he accepted responsibility as CEO of BP, but neither he nor BP was taking the blame. "I will always feel a deep responsibility, regardless of where blame is ultimately found to lie."
Hayward stuck to this line of argument, in spite of claims of gross negligence from partner companies like Anadarko, and in spite of claims made by other oil majors during congressional testimony that BP was a lone bad actor. "I think when the results of the investigation emerge, it will become evident that there was nothing unusual about the well design of Macondo, and many wells drilled by competitors have this well design, and it's simply not right to say it was a unique BP well design. That will emerge, along with many other things that will point to the Macondo accident as an accident for the deepwater drilling industry, and not for BP."
Question No. 2: What does the $32.2 billion charge taken by BP not cover in terms of potential oil spill costs?
Hayward gave a response on the earnings call related to this question that was the oil-spill-liabilities version of his infamous "a guesstimate is a guesstimate" comment about the oil-leak flow rate. Speaking about the $20 billion escrow fund as a proxy for ultimate claims to be paid by BP, Hayward said, "Whether $20 billion is good number, a high number or a low number, it's just a number."
It's important to keep in mind, as BP explained on the call, that the $20 billion escrow fund and $32.2 billion charge are indications of the potential oil spill liabilities that it can reasonable estimate, but that's far from all of the potential BP costs.
Byron Grote, BP CFO, noted that all of BP's estimates have been made on the basis of no gross negligence, as Anadarko and other companies have claimed in refusing to pay oil spill liabilities.
The only hard numbers that BP was able to use in its calculations were the $20 billion commitment it gave to the U.S. government, and the $1,100 per barrel of oil fine levied under the Clean Water Act. On this issue, Grote said that oil contained by BP when it was capturing 25,000 barrels to 30,000 barrels a day is not presumed to be subject to fines and penalties.
As far as the oil flow that is subject to penalties, BP still wouldn't say exactly how much oil it thought had been flowing into the Gulf before the cap was implemented. BP officials said on the call that they have used a mid-point number in the oil flow estimate range for purposes of calculating fines and penalties.
On the most important question -- what the charge taken in the second quarter doesn't cover -- the answer is that BP still can't say. BP explained a basic accounting principle: to the extent a company can't make a reasonable estimate of liabilities, it just has to list them as contingent liabilities, and it is only in the case of the Clean Water Act that BP is able to quantify potential fines.
BP took the $20 billion escrow fund charge on the basis of the nature of its commitment to the U.S. government, even if the oil company can't determine specific provisions for the $20 billion at this time.
BP did note about the $20 billion escrow fund that it's still negotiating the terms of the fund with the White House and U.S. Treasury, and expects to have a final agreement by the end of August. This was important to analysts because should BP's liabilities turn out to be less than the $20 billion committed, analysts wanted to know if BP would be able to reclaim interest gained on the cash held in escrow.
Question No. 3: Why the decision to sell as much as $30 billion in assets?
The deal to sell assets to
represented a sale of roughly 2% of BP's production for $7 billion. Hayward provided some simple math on the call, saying that multiplying the $7 billion by four, 8% to 10% of BP's production could be sold. BP projects a daily production rate of 3.5 million barrels.
Analysts, notably, Lucas Herman of Deutsche Bank, were concerned about the timing of the asset sales. The Deutsche Bank analyst asked why it had taken an event of this order for BP to review its business and move to a smaller, higher quality business.
To some extent, Hayward downplayed the asset sales, saying that BP has periodically looked at accelerating disposals that it has planned to make over a time frame of five years, and the more concentrated asset sale plan is simply something it needs to do and has the opportunity to take advantage of now.
"That's just the way the world is. It's something we discussed periodically but never drew the conclusion to do, and now it's not just an opportunity but a requirement," Hayward said.
Incoming BP CEO Bob Dudley stressed that a "somewhat smaller company" can create shareholder value going forward by allowing BP to reestablish its position in the U.S. -- though Dudley countered an insinuation that BP might act hastily in the capital markets, even though its sale of assets to Apache did not receive the tag of a "fire sale" from the Street.
"We haven't said we will rush back," Dudley said, adding, "look at our performance prior to the incident. The market was recognizing the quality of our portfolios. No one is saying we will rush right back." Dudley also reiterated this point about not being in a rush as it related to potential reinstatement of the BP dividend. The company plans to take up the issue of the suspended dividend after its fourth quarter earnings.
Question No. 4: Why is BP pursuing the net debt reduction?
Remember that at the time of the White House deal in June, BP said that it might issue more debt, as much as $5 billion to $10 billion in debt, to help shore up its balance sheet. Now, BP is saying that it will take net debt down from $23 billion to a level of $10 billion to $15 billion over the next 18 months.
As plans for BP to issue debt stalled after the White House deal, there were reports that BP couldn't find decent pricing in the debt markets due to its oil spill liabilities, and that it was seeking to extend bank credit facilities instead.
When asked on the conference call if the net debt reduction plan means that BP plans to meet all of its oil spill liabilities with cash generation and disposal of assets and not new debt, Hayward simply answered with a "yes."
BP CEO Byron Grote said on the earnings call that BP made the substantial addition of $12 billion in bank credit facilities in the second quarter converted, up from $5 billion to $17 billion.
BP has $8.3 billion in debt maturing in the next 12 months, and BP is looking to generate cash flow to cover those maturities, or it may yet issue new debt to replace the maturing bonds, Grote said.
In the larger scheme of things, though, the decision to bring debt down was made by BP for the same reason that it suspended its dividend, with company officials saying it was the prudent balance sheet decision to take given the unquantifiable level of oil spill liabilities that remain.
"Clearly, with uncertainty about liabilities going forward, it's now prudent to run the business with a lower level of debt," the BP CFO said. BP officials said the net debt decision doesn't reflect a view that risks have suddenly changed, but that BP needs to do some things operationally to assure that the risks are better managed. "It reflects the fundamental risk and uncertainty about liabilities that we will have to face in the U.S. and it's prudent to have lots of capacity on the balance sheet," Grote said.
Hayward stuck to the same line, saying that the net debt reduction plan provides flexibility to meet any obligations and that it's more financial prudence than BP might otherwise use, but is the right move given the liabilities the company may face.
Question No. 5: With the asset divestiture plan, can we be assured that BP plans to remain an integrated oil company?
This question, running to the heart of the future for the oil company Dudley is taking over, was asked in several different ways and at different times during the oil spill, in regard to the $30 billion asset sale plan and the strength of the refining business in the U.S. in the second quarter, an outperformer that BP said can't be expected to reach its second quarter levels again.
One analyst asked bluntly, since the downstream business performance was exceptionally strong in the quarter, does the new BP leadership believe in the integrated oil model, or is all under consideration as momentum is coming through in the refining business?
The question about the future of BP was passed on to new incoming CEO Dudley, who stressed that the accident had not altered the company's view of its business model of being an integrated oil company. Divestments will mean a company with $250 billion in assets, and Dudley noted that even the asset sales shouldn't lead anyone to the conclusion that BP is set to change its business model.
American-born Dudley spoke specifically to the U.S. operations of BP as it related to this question, saying that the asset sales strategy doesn't indicate or infer any conclusion that BP should alter its business mode, such as geographic changes like exiting the U.S. market.
"We have a lot to offer in the U.S. to the oil and gas industry, and getting it right and meeting our existing commitments is vital to BP's future success in America," Dudley said.
BP shares were down 2% in U.S. trading at midday, and traded down 2.6% in London after the second quarter earnings announcement.
-- Written by Eric Rosenbaum from New York.
>>BP Takes $32 Billion Charge: Hayward Out
>>Is Dudley Right Man For BP CEO Job?
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