Some quick initial thoughts on BP

This is not investment advice, and I have no position in BP or energy. I can’t confirm the date, but I want to pass along what the telegraph mentioned (my bold):

The decision by Tony Hayward, BP’s chief executive, to slash costs earlier in the cycle than some of its rivals has borne fruit, although costs were only slightly lower in the first quarter because of currency effects. However, the $4bn in cash costs removed from the business in 2009 is helping operational performance….

This is below the 20pc to 30pc gearing range the company has targeted and investors can be confident that the dividend is secure. This means the shares are yielding almost 6pc, which is well worth having.

The first-quarter dividend of 14 cents will be paid on June 21. The corresponding amount in sterling will be announced on June 8, calculated from the average of the market exchange rates for the four dealing days prior to that.

New investors have until May 5 to buy the shares and qualify for the payment, and this is the eighth successive quarter that the dividend has been maintained at the same level.

It’s May 4th, so according to the article you have one more day to lock in new shares of BP stock to qualify for their fat, juicy June 21st dividend. If catastrophe capitalism of the 21st century is going to involve a lot of privatizing the gains of massive environmental degradation through big dividends while socializing the losses, psychologically it feels better if you can get some token amount of those dividends. In fact, it’s the 21st century neoliberal promise that we can all qualify to own token amounts of those dividends.

(Yes, I can hear the MM crowd saying that dividends don’t matter, but think of the signaling embedded in releasing a strong dividend right now.)

A few things:

– Ezra Klein did an interview with Lisa Margonelli, who notes that “we’re still using oil and its coming from other places. Some is coming from Canada and Norway and Mexico, and they have pretty good records. But on the whole, we’re going towards dicier and dicier places. The big pockets of oil are in places that are politically or geologically difficult to get to. Deepwater off Angola, drilling in Nigeria, the Exxon project in Chad.”

Those of you who are interested in such things might like to take this moment to visit James Ferguson’s short paper: “Seeing Like an Oil Company: Space, Security, and Global Capital in Neoliberal Africa.” In response to James Scott’s thought that large-scale globalizing capital’s agency might look similar to the agency of large-scale state action, an agency of homogenization, uniformity, and the gridlike simplification of space (a thought that the End of History crowd shares to a degree), Ferguson points out “today’s forms of capital investment in African mineral extraction have been noteworthy for their ability to bypass the nation-state frame altogether. Where national states are weak, collapsed, or configured in such a way that they thrive less on order than on disorder, many sorts of capital investment are thereby discouraged. But such conditions need not inhibit mineral extraction…Indeed, it is worth asking asking whether Africa’s combination of privately secured mineral-extraction enclaves and weakly governed humanitarian hinterlands might constitute not a lamentably immature form of globalization but, rather, a quite “advanced” and sophisticated mutation of it.”

– I remember several energy traders at a hedge fund I knew talking, years ago, about how surprised they were that BP was able to build an environmentally friendly reputation through sheer marketing alone. Kate Sheppard, who is presumably not an energy trader at a hedge fund, blows that myth up in a great article.

– I need to think more about this, but this does open my eyes to the idea of using aggregate GDP to capture the impact of environmental harm. In theory, GDP could go up from this accident.

– A peak into the Minerals Management Service, the division of the Interior Department responsible for offshore drilling, a farce under the Bush administration.

– This kind of argument might go quiet for a while, but take a look at how much the market applauded BP for “cutting costs.” Doing a google search down memory lane finds all kinds of applause for how ruthless BP was with cutting costs – it seems like it was the best thing they could be doing at any given moment.

For instance, “The City has been impressed with Hayward’s cost cutting drive, which has resulted in 22,000 staff leaving the company in two years and $4bn in savings last year. Last month, the market value of the company overtook its closest rival, Shell, for the first time in more than three years.” They keep going. Giving such a focus on the short term, and such a focus on profit and shareholder value above all else, is it not surprising that extra spending on precautions won’t take place?

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2 Responses to Some quick initial thoughts on BP

  1. Andrew says:

    Mike, I’ve been a huge fan for a while, but not seen a chance to add any value to the material you post. Here, I may have something to contribute. I work in middle management for a large oil and gas company, and have worked for BP in the (not recent) past. I have several former colleagues who are BP employees.

    Yesterday, I sent an eMail to my wife (also a former oil company employee), title “Hoocoodanode?” (I was also a big fan of the late Tanta at CR). I wrote:

    Hoocoodanode? was coined by Tanta at the Calculated Risk site addressing the way that subprime went south: basically, all the elements of the disaster were in plain sight, and multiple parties were pointing to problems years before the final meltdown happened. But it was convenient for those making money off the existing practice to ignore or downplay the risks involved, and at base, there was a pretty simple belief: the housing market only goes up.

    We’re going to see exactly the same questions asked in the next weeks and months about the BP/Transocean disaster in the Gulf of Mexico. My guess is that the specific cause of the accident will be discovered quite soon, or is known already, and a combination of (in and of themselves) quite unlikely events will be blamed. But underneath it all, you’ll find a mindset along the lines of “blowout preventers don’t fail.”

    BP is currently building some structures that they hope will cap the well, but these won’t be ready for a while. Why didn’t BP, or other drillers in the GoM have these ready before they began to drill the deepwater well? Either because the domes have to be precisely customized for a given well, and would make it uneconomic, or because the construction of domes was seen as unnecessary insurance for a very low probability event – because blowout preventers don’t fail.

    It’s possible that some of your readers will chortle at this assertion, but one cultural change in the industry in the last 20 years has been a much stronger commitment to safety. My company is relentless at trying to improve its safety performance, and this genuinely goes all the way to the top of the company. So the initial response of most of our colleagues, and likely the initial response of the senior BP/TransOcean leadership, was horror at the loss of 11 lives on the rig: the concern for the potential spill came later.

    Ms Margonelli is absolutely right that it’s getting harder and harder to find big pockets of the stuff anywhere, and it’s always geologically, technically and (usually) politically challenged. Two other aspects to the way we do business: as with the banking sector, margins have been ruthlessly squeezed by competition and fiscal take by host governments. So we’re doing extraordinarily complex and challenging work, for thin margins. Sound familiar? As I wrote earlier, likely there will be some point at which we’ll discover that a set of risks were very inadequately understood, and this will have been for cultural reasons, not because of individual actions (some “bad apples”).

    Also, we’re typically part of a web of different companies providing specialized services. Tony Hayward has been criticized as being tone deaf when he made a distinction between BP as the owner of the well and Transocean as operator of the rig and equipment, but that distinction would matter a lot to the folks at BP – not because Heyward is seeking to offload legal responsibility or accountability for the incident, but because he’d be looking at whether BP’s systems broke down, or whether his contractor’s systems failed.

    Tony Heyward simply has to cut costs to have any chance of success. All his peers do. The oil and gas business is at the far end of the business model curve: we are the embodiment of the commodity business. We can do very little to move our top line except keep finding enough stuff in harder and harder places to replace what has already been produced, and we don’t control our sales price. Governments act to cream off much of the upside (this is, in my view, entirely as it should be), so our top line has very little potential for growth. The only way most companies in our part of the investment universe improve their profitability and attractiveness to investors is by controlling costs.

  2. chris says:

    Similarly, Bobby Jindal should be thanking his lucky stars right now that he only mocked volcano monitoring and not oil spill preparedness.

    All kinds of contingency planning look worthless until the emergency arrives. The temptation to cut them in good times is always strong, and it always looks like a free win when you have done so. For a while.

    The same goes for the WV coal mine disaster (which is already eclipsed by the current oil spill).

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