BP Takes $32 Billion Charge; Hayward Out

LONDON ( TheStreet) -- BP ( BP) reported a $32.2 billion non-operating charge in the second quarter, leading to a loss per share of $5.42, or a loss of $17 billion for the quarter.

The $32.2 billion charge was one of the three highlights in the second-quarter earnings report, with BP also confirming that CEO Tony Hayward is being replaced by Bob Dudley, and BP saying it will sell another $23 billion in assets over the next year and a half.

Ahead of BP's earnings, there were expectations that the oil company would take a one-time charge to its second-quarter earnings. Some analysts expected a second-quarter loss of between $13 billion and $15 billion due to oil spill costs, and one of the worst quarters from a British company in history.

The $32.2 billion charge includes Gulf of Mexico oil spill costs to date of $2.9 billion and a charge of $29.3 billion for future costs, including the funding of the $20 billion escrow fund.

Outgoing BP CEO Tony Hayward said in the earnings release, "We expect we will pay the substantial majority of the remaining direct spill response costs by the end of the year. Other costs are likely to be spread over a number of years, including any fines and penalties, longer-term remediation, compensation and litigation costs." BP said it could not provide a reasonable estimate for these additional costs.

After adjusting for the non-operating items and fair value accounting effects that resulted in the $17 billion loss, BP's second-quarter underlying replacement cost profit was $5 billion, compared to $2.9 billion in the second quarter of 2009.

The $17 billion loss may be the worst quarter ever from a British company, based on estimates provided on Monday.

In the first quarter of 2010, BP earned $1.75 on revenue of $74.2 billion, and reported a net profit of $6 billion.
Associated Press
Robert Dudley (above) will replace Tony Hayward as BP's CEO.

BP tried to put a positive spin on the second-quarter results, ex-oil spill charges, noting that second-quarter operating cash flow, excluding Gulf of Mexico oil spill costs, was $8.9 billion, up 31% over the same quarter last year.

BP also noted in the second-quarter earnings that the higher operating cash flow enabled the oil company to reduce its net debt by $2.9 billion, despite Gulf of Mexico oil spill costs.

BP said in the earnings release that it plans to dispose of $30 billion in assets -- including the $7 billion sale to Apache ( APA) -- in the next 18 months, while also reducing its net debt to $10 billion to $15 billion. Net debt was $23.2 billion at the end of the second quarter.

The news of more asset sales from BP was not a complete surprise, as some analysts had been predicting a leaner BP as part of its survival strategy. Hayward said of the asset sales to be made, "By disposing of assets worth more to others than to BP we can better align our strategic footprint with our global strengths."

Analysts have been all over the map, with projections that BP will be on the hook for as little as $15 billion to as much as $90 billion in oil spill liabilities. The Credit Suisse estimate of $37 billion in total costs seemed to be the de facto reasonable "middle ground" throughout the oil spill crisis, and the $32.2 billion charge taken by BP in the second quarter came in close to that projection.

In fact, several Street reports in the days ahead of the BP earnings expected BP to quantify projected oil spill liabilities as high as $30 billion.

Of the $4 billion already paid by BP in oil spill cleanup and containment costs, $2.1 billion was incurred in the second quarter.

Tony Hayward's Last BP Earnings

BP announced concurrent with its earnings that CEO Tony Hayward was being replaced by American-born managing director Bob Dudley, effective Oct. 1. Dudley, who is a member of BP's board and as managing director oversees the company's operations in Asia and the Americas.

BP chairman Carl-Henric Svanberg said in the earnings release, "The BP board is deeply saddened to lose a CEO whose success over some three years in driving the performance of the company was so widely and deservedly admired."

Hayward, as expected, has been nominated for a post as a director of BP's huge Russian joint venture, TNK-BP, which ironically, had been a business run by Dudley for several years.

Hayward will remain on the BP board until Nov. 30. Hayward stated in the earnings release about his decision to step down from the CEO post that, "The Gulf of Mexico explosion was a terrible tragedy for which -- as the man in charge of BP when it happened -- I will always feel a deep responsibility, regardless of where blame is ultimately found to lie."

There was reluctance to view the removal of Hayward as a decision that was merited by the details of BP's financial performance during his tenure. For these Hayward defenders, his removal as CEO would not be a judgment on his performance running a successful integrated oil company, but simply the recognition that BP can never recover its reputation in the U.S. as long as Hayward is CEO.

BP's U.S. operations are critical, representing 40% of the company's assets.

With Hayward's resignation, one BP historical factoid remains law. BP announced in June that it was eliminating its hefty dividend payment for shareholders amid public backlash over an annual dividend of more than $10 billion during the oil spill. No BP CEO has ever survived a dividend cut.

Tony Hayward's Severance Package

BP announced that Hayward would receive a severance payment roughly equal to one year's salary, or in the neighborhood of $1.6 million -- and annual pension payments totalling $1 million per year. The BBC reported on Monday that Hayward will also receive a pension package worth as much as $16 million. The Sunday Times, taking a stab at the overall financial parachute, reported that Hayward would receive $18 million. Hayward also holds millions of BP shares in a long-term incentive plan.

As the first reports broke on Hayward's departure and the financial terms of his stepping down as BP CEO, the political backlash was immediate, and not surprising.

Rep. Edward J. Markey (D-Mass.), Congressional thorn-in-the-side of BP, demanded that BP not provide a golden parachute to Hayward until it had paid all of the costs resulting from the company's spill. BP has not yet fully funded the $20 billion escrow account set up to compensate Gulf of Mexico victims from the spill.

"At a time when BP should be devoting every possible resource to ending the spill, cleaning up the Gulf and fully compensating the residents who have had their livelihoods impacted, I find it extremely troubling that BP's board would consider providing such a large severance package to Mr. Hayward," Rep. Markey wrote to Carl-Henric Svanberg, chairman of BP, on Monday afternoon. "BP should be dedicating its resources to compensating the residents of the Gulf Coast who are the victims of this tragedy, not handing out multi-million dollar golden parachutes."

BP Earnings By the Numbers

BP's second-quarter replacement cost loss was $16.9 billion, compared with a first-quarter replacement cost profit of $5.6 billion.

Non-operating items and fair value accounting effects for the second quarter had a net unfavorable impact of $22 billion, vs. a first-quarter net $49 million unfavorable impact.

Net cash provided by operating activities for the second quarter was $6.8 billion, including an outflow of $2.1 billion resulting from the oil spill. In the first quarter, BP net cash was $7.7 billion.

Net debt at the end of the second quarter was $23.2 billion, vs. first-quarter net debt of $25.2 billion. BP plans to reduce net debt to $10 billion to $15 billion.

BP expected capital expenditures of $18 billion in 2010 and $23 billion more in asset sales. Previous to the second-quarter results, BP expected capital expenditure of around $20 billion and disposal proceeds of $2-$3 billion.

-- Written by Eric Rosenbaum from New York.

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