Steering bp back from the brink in wake of deepwater horizon oil spill

The clean-up operation for the Deepwater Horizon spill After the disastrous Gulf of Mexico oil spill last year, triggered when Deepwater Horizon exploded and sank, the news provided a

much-needed boost for the oil giant. However, it was not until last week that the long-standing gloom around BP’s shares lifted. The share price rallied when Anadarko Petroleum, one of BP’s

minority partners in the ill-fated oil well, paid $4 billion (£2.5 billion) to settle all claims between the two companies. The settlement is also an indication that BP was not guilty of

gross negligence for the spill. The company has denied gross negligence. With just days to go before the BP reports its third-quarter results and with investor pressure building for evidence

of a clearer strategy, has the BP supertanker started to turn around from the Gulf of Mexico oil spill which brought it to a halt? BP’s market value plummeted as the extent of the oil spill

became apparent and its current capitalisation of £82 billion values the company substantially below the estimated £170 billion value of its assets on the balance sheet. > Has the BP 

supertanker started to turn around from the Gulf of > Mexico oil spill which brought it to a halt? This low valuation could leave BP vulnerable to takeover by opportunistic rivals. For

investors, the key question is whether this week’s third-quarter results will show that BP is on the cusp of a turnaround. One BP investor says: “We think it’s now at the tail end, we feel

that a process is in train to make sure that the Gulf is all dealt with and the company can move on. “We recently met chief executive Robert Dudley and like him. Despite everything that

happened in the Gulf of Mexico, we think they’ll be back drilling there soon.” However, the City is expecting relatively poor results as the company’s earnings and production numbers

continue to show the impact of diminished activity in the Gulf of Mexico. Consensus profit forecasts have an average of $4.9 billion, a decline of 11 per cent on the same period last year.

Production for the quarter is forecast to be 12 per cent lower than the same quarter last year. The results could put pressure on BP to update investors on its strategy. Dudley is preparing

a “grand strategy update” in time for next February’s fourth-quarter results. Many investors, are clamouring for clarity sooner. Complicating all decisions and seen as the biggest drag on

its share price, is uncertainty over how much BP will have to pay for the Gulf spill and whether it will be found grossly negligent, something it has denied. Civil litigation, the largest

ever, is due to start next February but in the meantime, the US Department of Justice continues to investigate. This is why the Anadarko settlement was a big deal. The payment “is credible

evidence that BP is not grossly negligent,” says Jon Rigby, analyst at UBS. The settlement also allows BP to end its payments into the $20 billion (£12.5 billion) compensation trust it set

up after the spill. These will finish in 2012, a year ahead of schedule. The news leaves Dudley freer to concentrate on the much-anticipated strategy. The American, who was once head of BP’s

Russian operation, has already endured a strategic disappointment. His attempt at an alliance with Rosneft, the Russian state oil champion, foundered earlier this year after BP’s partners

in its other Russian venture TNK-BP objected. The most radical option for BP would be a break-up, splitting the downstream refining and marketing from the upstream exploration and production

operations. Analysts estimate that BP can add between £60 billion and £90 billion to its value if it hived off its less profitable activities. But BP would have to demonstrate that a more

focused business, coupled with better decision-making, would lead to better performance and as a result a better valuation. Another possible route would be to fragment the company, spinning

off and floating parts of the group. Selling more assets is another option as BP has indicated it plans to exceed the $30 billion (£19 billion) target it has already set for disposals.

According to those familiar with BP’s thinking, one possibility is to increase the disposal of downstream assets in the US, where the group has already put two big refineries up for sale.

Another obvious route is to raise the dividend or launch a big share buy-back programme. Once BP has finished paying into the $20 billion fund it established last year to help pay for costs

and claims in relation to the Gulf of Mexico spill, its cash position will change dramatically. Meanwhile, the oil giant is investing aggressively. It has rights to explore off Libya. BP has

also entered the critical new markets of India and Brazil. More than a year after the devastating spill in the Gulf of Mexico, Dudley and his chairman Carl-Henric Svanberg may be starting

to make progress at last.