With its 4Q results missing estimates, BP faces many challenges in 2011/12. In particular, BP's strategy for growth in in the Gulf or other offshore projects potentially face more regulation and higher cost. Lower Gulf of Mexico production as well as asset sales led to the lower-than-expected oil and gas production in 4Q 2010, and BP's plan to resolve these issues remains unclear.
BP PLC (BP) has found itself under pressure from the Kremlin to cede control of its joint venture in Russia, TNK-BP Holding OAO, to a state-owned oil monopoly such as Rosneft NK OAO or Gazprom OAO - the latest attempt by the Russian government to expand its energy monopoly and drive out international oil majors. This Oil Field produces upto one fourth of BP's total oil and natural gas production. Soon after, Royal Dutch Shell PLC (RDS.A) was forced to relinquish control of its Sakhalin-2 oil and gas project to Gazprom for $7.45 billion when the Russian government threatened to block investment plans by canceling building permits on environmental grounds. And just last year, TNK-BP was talked into selling its 62.8% stake in one of the world’s largest gas fields, the Kovytkta field, to Gazprom, after Russian authorities threatened to revoke the company’s license to develop it.
BP's Russian venture TNK-BP, was also raided by Russian security forces. Why? One of the TNK-BP employees is being accused of espionage (he is an alumni member of the British Council). And now an environmental inspection has been called, looking into BP's practices in the country. The New York Times reports on the latest troubled for BP in Russia: "The fact that Russia is concerned about environmental ethics at this point is almost laughable. While BP's environmental record isn't exactly spotless (remember the 2006 Prudhoe Bay shutdown due to a leak), it seems a little suspect that Russia is going after BP at this time. What it really looks like is a move to muscle in and get a bigger piece of the oil pie."
In any case, none of this is really good for BP. BP is generally the odd one out in Big Oil, struggling to make profits as large as the other companies, and struggling more to keep its stock prices higher. And, even though BP plans to increase its Prudhoe Bay operations, it is doubtful whether this will be enough to overcome the trouble that continually seems to plague the company.
Since the oil spill in the Gulf, BP's stock has experienced almost a 40% decline in value. The two reasons for the decline are the mounting financial costs from the spill and a possible dividend cut. Although no one can predict the extent of the costs, the overall cost is going to amount to billions of dollars
BP reported an 148% increase in net income for Q3 of $10B as oil prices were still high and over the $100 per barrel barrier. However, since mid summer, oil prices have been cut in more than half since its ~$150 high to under $70. Lower selling prices, shrinking margins, and decreased demand due to struggling economies do not bode well for Q4.
BP (BP) is often considered the least successful of Big Oil companies. It had the lowest profits of the major Big Oil companies last quarter. Indeed, with a $3 billion profit, it couldn't come close to Exxon (XOM) in terms of oil company profits.
Perhaps BP is experiencing a bit of a boost from the fact that the company insists that it will be cutting costs. BP plans to get rid of 5,000 jobs. Unfortunately, this may not lead to more profits in the long run. While $3 billion in profit is still a profit, BP would have had more than $4 billion in profits last quarter if not for the fact that it sustained losses from a payout resulting from the 2005 deaths of 15 workers at a Texas BP refinery.
Stock prices tends to reward "cost-cutting." But cost-cutting now could lead to increased costs later. Before deciding on BP, it is important to look at its record. PRNewswire reports on BP's cost-cutting record:
BP's earlier excessive penny-pinching on both safety and maintenance was blamed for the Texas City disaster and its Alaska pipeline shutdown in 2006," said Judy Dugan, research director of the Foundation for Taxpayer and Consumer Rights. "The company says it is only cutting corporate jobs, but since safety oversight is not a profit center, BP risks the same bad judgment that led to Texas City. ...
BP has remained relatively stable; its rising stock prices are some of the lowest among Big Oil companies. Even when it's rising, BP stock doesn't make huge leaps and circumstances often force BP stock to drop again later. Its valuation is not considered particularly good as a result.
Beyond proving an adage in Russian investing — do not turn you back on your Russian partner — the vote highlighted BP’s continuing struggle to maintain control over a pumping asset that is exceptionally important for its global business.
The talks between BP and Gazprom on international cooperation had continued for nine months, without result, before the pressure began on TNK-BP; no evidence has emerged to date that the issues are related. Gazprom has denied any hand in the TNK-BP dispute.
While unsuccessful, the latest maneuver by the Russian shareholders on Monday lays the groundwork for lawsuits against the British-nominated board members in Russian courts, an official close to the Russian partners said in a telephone interview.
The Russian partners had called the board meeting Monday of a subsidiary, TNK-BP Management, to contend that TNK-BP’s chief executive, Robert Dudley, had violated Russian labor, migration and tax laws. But three of five board members at TNK-BP Management are appointed by Mr. Dudley himself; they voted to retain him.
This vote exposed the board members to potential lawsuits for voting in violation of the company charter, which requires that board members ensure the chief executive upholds Russian law.
BP’s spokesman in Russia, Vladimir B. Buyanov, said the Russian partners’ allegations against Mr. Dudley “lack substance and are misleading.” BP officials have, in turn, accused the Russian partners of pulling strings in the Russian bureaucracy to prompt inspections and citations for regulatory violations.
Local BP gas stations are raising their prices and are offering "cash only" discounted prices at the pump. When speaking with an owner, it was explained to me that BP has been increasing their transaction costs to their gas stations essentially cheating the gas stations out of their profits. Bad business practices such as this eventually affects the underlying stock because people lose trust in the company.
The main offshore exploration operations of the company are located in the North Sea, but reserves in this region are almost saturated. BP would thus have to make huge investments in exploration projects in different parts of the world, which would affect the margins of the company.