Impact of BPs corporate financial management strategy

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British Petroleum renowned as BP plc is the world's largest energy companies. With its headquarters in London, BP operates in six continents providing their products and services to customers in more than 80 countries with 22400 service stations across the globe. BP has its largest division in the USA which is headquartered in Houston, Texas. BP is listed primarily on London stock exchange and secondly on New York Stock Exchange. Anglo-Persian Oil Company which was founded by William Knox D'Arcy in 1909, integrated as a subsidiary of Burma Oil Company which became Anglo Iranian Oil Company. As a consequence of Second World War Anglo Iranian Oil Company became British Petroleum in 1954. Ever since, BP started expanding itself across the globe and also merged and acquired companies like Amoco, Arco, Sohio, Castrol and Aral. It has been under the regime of different Chief executives with Bob Dudley as the current CEO (BP p.l.c, 1999-2010).

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According to the Ownership statistics of BP, 40% of its shares are with the UK shareholders and 39% with the US shareholders, the rest being distributed between Europe and other parts of the world (BP plc, 1999-2010). Its key shareholders are Street global advisors, Wellington management co.llp, Fidelity management and research, Trade winds global investors llc and Citigroup global markets (USA) (Financial times ltd, 2010). Its current share price in terms of GBP is £ 439.35 and in terms of ASD it is $41.00 (BP p.l.c, 1999-2010). According to the annual report of BP in 2009, its refined throughput per day is 2.3 million barrels with proved reserves of 18.3 million barrels of oil equivalent. It has declared $229 Billion revenue on Sales and other operations and also a Replacement Cost Profit of $14.0 Billion in the year 2009. Replacement cost profit attributable to BP shareholders has been reported as $14.0 Billion. Dividends paid per ordinary share in terms of cents and pence are 56.0 and 36.417 respectively and dividend paid per American depository share (ADS) is $3.360. BP has recorded a headcount of 80,300 in December 2009 which has fell by 11,700 compared to that of 2008, reflecting the conversion of many US retail sites into franchise model and also as BP tried to progress itself as a more simple and efficient organisation(BP p.l.c, 1999-2010). Though BP claims itself to be responsible towards the society there have been many allegations against BP's corporate social responsibilities which includes the most recent deepwater horizon oil spill. This report further, deals with the causes and occurrence of the deepwater horizon oil spill, its impact on BP's financial strategy and its effects on the exploration and production activities within the energy sector.

BP oil spill 2010: BP oil spill also known as the Deepwater horizon oil spill occurred on 20th of April 2010, on the Mocondo well of the Gulf of Mexico. The operation was owned by Transocean under the contract of BP and the installation and cementing for production casing was done by Halliburton energy services (WSJ, 2010). The oil spill stemmed from a control event undertaken by deepwater horizon semisubmersible mobile offshore rig drilling unit. The event allowed hydrocarbons to escape into Transocean deepwater horizon from Mocando well, which led to huge explosions and fire on the rig. There fire continued for 36 hours leading to an incessant flow of hydrocarbons through the blowout preventer and wellbore from the reservoir for 3 months causing an oil spill significant across the world. There were 11 people who lost their lives and 17 people injured in the accident. It has also caused huge damage to the wild life and marine habitats which had an extensive impact on Gulf's Fishing and Tourism industry. As this accident of BP was the second one after the Sea Gem oil spill, BP not only had huge financial loses but also had a backlash on its reputation.

BP's strategy for the year 2009 towards maintaining sustained momentum and growth. Safety, people and performance has been BP's prime priority, robustly emphasising on continuous improvement in Exploration and Production operations. Their strategy mainly aimed at building greater value for shareholders by making investments for the growth of exploration and production businesses together so as to provide high quality returns through their operations. Their strategy in Exploration and Production businesses is to emphasise on reliability, safety and efficiency by reinforcing their portfolio of leadership. Their strategy in Refining and Marketing is to enhance portfolio quality, maintain integration across the activities of value chain and improve the efficiency of performance (BP annual report, 2009).

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In March, 2010 BP summarized its financial plans for the period between 2010 and 2015. BP quoted its plan to take an opportunity out of its portfolio by reducing its costs with continuous improvement of efficiency to achieve its aim of perking up its annual pre-tax profitability by more than $3 billion (BP p.l.c, 2010). BP announced it's forward looking statements in terms of production outlook, predicting an average of 1-2% a year growth in production until 2015 with $60 per barrel and its sustainability of growth until 2010. The Refining and Mining segment of BP has stated its commitment towards improvement of profitability by $2 million for the upcoming 3 years. BP has plans of investing in 24 new projects over the next 2 years mainly concentrating on Gulf of Mexico, North Sea, Azerbaijan and Angola which are high margin production areas improving their portfolio. Gulf of Mexico played a key role in strengthening BP's portfolio producing 500 barrels of oil per day. Potential production from this province was expected to grow constantly.

The Deepwater Horizon oil spill had a deep impact over BP's financial condition. BP invested huge amounts of financial capital in research and other compensatory activities. On June 16th 2010, BP announced a $20 million escrow fund to composite the obligations that arose from the oil spill, with $3 billion and $2 billion during the third and fourth quarters of 2010 followed by $1.25 billion every quarter until the amount reaches $20 billion (Marketwatch, 2010). On June 27th 2010, Bob Dudley was announced as the new chief executive of the company replacing Tony Hayward. The company sold assets worth $12 million to Apache so as to raise funds for the compensation activities, Citigroup with a second smaller bank agreed to provide $20 million compensation funds. It has also arranged for processes that are dedicated for managing funding and claims. BP has announced its plans of restructuring its upstream operations into three different segments also creating a new safety division around the world. The NEW CEO Bob Dudely, has stated that the company's urgent priority would be safety and risk management. The company has also announced a £32.2 billion pre-tax charge including the $20 million claims fund towards the spill. BP has also announced that it would use the sales from Azerbaijan and Angola to back $5 million of loans towards the compensation fund. According to the quarterly results of BP, The replacement cost loss for the second quarter of the year 2010 was $16,973 million, as when compared to the profit of $3,140 million and $5,598 million during the year 2009 and first quarter of 2010 respectively. Following its profits in the year 2009, BP has introduced a new Scrip dividend programme enabling its shareholders to elect for a receipt of new fully paid shares instead of cash. As a consequence of the Deep water horizon oil spill, BP has withdrawn the dividend policy considering its financial and asset position.

Shareholder wealth maximisation (400):

After the Deepwater horizon oil spill, many of BP's safety errors have come into the light and BP tried to cover all those by promoting itself as a leader in CSR by spending over $200 million in advertising. There were many allegations against BP, saying its strategy of cost cutting led to the disaster. The cost-cutting decisions made by BP in terms of design and construction that has increased risk to a great extent. BP was further, been accused for its interest towards increasing shareholders wealth ignoring the safety regulations. There has been a significant gap between BP's Green image and its business priorities (SSRN). Why, BP's Corporate social responsibility was powerless of moving to a level beyond profits showing low committed attitudes and practices has been questioned and the answers was that, BP has run its operations towards shareholder wealth maximisation. BP, has always marketed itself as a socially conscious company and the oil spill was considered as a sense of betrayal by many of the ethical customers. Controversies over climate changes within the energy industry have been an increasing concern for shareholders. (Sunddep T and Alison maitland glen Arnold: 9).

This, situation shows, how the corporate social responsibilities battles have changed over time. As, stated by Milton Friedman "fundamentally subversive doctrine" in a free society, adding: "There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits." (FT, 2010). However, Jensen, 2001 states that a company without maintaining good relationships with employees, customers, government and suppliers cannot ever add value to its shareholders. He further adds saying, this is a framework which includes both corporate social responsibility and shareholder wealth maximisation. This was misunderstood by many consultants and CSR officers as, to fulfil a social role a company must stabilise its stakeholder interest. In the case of BP, it seems that this misconception of shareholder theory was followed. A testament to this could be that BP has been marketing itself as a socially conscious traditional company so as to gain a value within its customers. BP's environmental strategy which has been "to create value for its shareholders by producing energy in a way that is affordable, secure and doesn't damage the environment" (BP, 2010). BP, has however defended all the accusations, by using the strategy of blaming other companies like Halliburton and Transocean who were involved in cementing operation of the deep water which has not yet been confirmed (FT, 2010). Considering the above statements, though it is proving that shareholder wealth maximisation was a reason behind the deepwater oil spill, it is not the only reason for the disaster to occur.

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Impact on future exploration (200): The deep water horizon oil spill had a great impact in the exploration and financial management within the oil sector. The first affect of this would be the reduction of approvals for exploration in the Gulf region by the Bureau of Ocean Energy. There have been only 12 approvals granted for a period of five months after April 20th 2010, where usually there would be at least 10-15 approvals a month (FT, 2010). There have been regulations increasing on the exploration and production operations even on the state land and waters and the US government wants all the companies drilling off the US coast to adhere to the safety standards of US. A higher risk premium would be demanded by capital providers for explorations in deepwater regions increasing the insurance costs (Grant thorn). The senate bill called for a redundancy in the equipment of blowout preventer, as they need repair inspection and maintenance. Following the mistakes of deepwater horizon oil spill, "Recognition and reform" of the Mineral Management services have begun performing additional inspections before the drilling operation start off. Higher civil and criminal penalties will be charged (Grantthorn) affecting the smaller firms in the sector.

Impact on financial management in the sector (200): On the financial grounds, It is anticipated that the price on drilling operations would be raised being beneficial for service organisations where there would be more necessity of casing, cementing and inspection. Marginal profitable projects will not be sanctioned (dexia )and this may lead to improvement of quality of the service organisations and increasing mergers as small companies will not afford for higher insurance cost payments . There are also improved regulations of blow out preventer, increasing the number of blow out preventer to two or more instead of one. The price of each blow out preventer is anticipated to be raised (Grantthorn) resulting in additional costs to the companies. There is also a demand to introduce the testing of fail-safe devices which would incur additional cost for testing the equipment. The $75 million federal cap on economic liability is expected to rise to $10 billion which would be one of the key drivers of consolidation of gas companies (Grantthorn). Acquiring an insurance coverage of $10 billion would be far difficult for smaller companies making the Gulf region uneconomical for these companies. However, integrated large oil and gas companies could be granted permissions as they have the required strength for the drilling operations.

Conclusion:

As a concluding note, the Deepwater horizon oil spill has affected everyone who is either directly or indirectly involved. Also for BP, it has impelled an improvement in new capabilities in terms of Collaboration, Systemisation, Information and Innovation. However the oil and energy sector is yet a very interesting sector probing continuous investment of shareholders.