BP Loses $22 Billion in Legacy of Share Buybacks
BP CEO Tony Hayward. Photographer: Joshua Roberts/Bloomberg
June 28 (Bloomberg) -- Stephen Jennings, chief executive officer of Renaissance Capital, talks with Bloomberg's Ryan Chilcote about BP Plc's assets in Russia. Jennings, speaking in Moscow, also discusses U.S.-Russia relations and the outlook for the Mongolian economy. (Source: Bloomberg)
The Skandi Neptune offshore support vessel controls a remotely operated underwater vehicle at the site of the BP Plc Deepwater Horizon oil spill in the Gulf of Mexico off the coast of Louisiana. Photographer: Derick E. Hingle/Bloomberg
Add $22 billion and counting to the loss for BP Plc from the Gulf of Mexico disaster.
The sum represents the hole after the 53 percent plunge in BP shares since the Deepwater Horizon exploded and sank, resulting in the worst oil spill in U.S. history. BP bought back more than $37 billion of its stock in a bid to return money to investors between 2005 and 2008. Those shares are now worth $15 billion, excluding dividends.
As Chief Executive Officer Tony Hayward surveys the company’s assets for sales to raise cash, BP’s treasury still holds 1.86 billion shares, equivalent to a 10 percent stake worth 5.7 billion pounds ($8.6 billion). Hayward should sell shares to ease concern that BP’s creditworthiness is deteriorating, Alastair Syme, an analyst at Nomura Holdings Inc. in London, said last week.
“No one expected that this was going to happen and that the shares would be decimated,” said Philip Weiss, an analyst with Argus Research Group in New York. “But it makes a case for how buybacks can hurt a company.”
Because of the risks now associated with lending to BP, the company would pay an extra $566 million a year in interest costs to raise $10 billion in the bond market, compared with what it would have needed to before the accident.
The average yield on BP’s bonds has surged to 607 basis points, or 6.07 percentage points, more than benchmark rates, from 41 basis points before the rig explosion on April 20, according to Bank of America Merrill Lynch index data.
Toby Odone, a spokesman for BP, declined to comment on the possibility of selling shares or on past buybacks.
Considerable Firepower
“We’ve got considerable firepower here to deal with any costs as they accrue,” he said. “And we will go forward using the tools that we have at hand to generate the funds to meet any liabilities.” BP has about 1.9 billion shares in treasury, he said.
BP agreed on June 16 to set up a $20 billion escrow fund to be administered independently byKenneth R. Feinberg, the Washington lawyer who also mediated disputes over compensation from the 2001 terrorist attacks. Raymond James & Associates Inc. has estimated that the spill may cost BP about $62.9 billion.
The stock plunged to a 14-year low last week even after the company said it could access $15 billion in cash and credit lines. That’s on top of the $7.5 billion in future dividends BP has scrapped and $10 billion in proposed asset sales. The shares closed at 304.6 pence June 25, capping a ninth week of declines.
Embarrassed
“Lots of companies have been embarrassed by buybacks,” said Colin McLean, chief executive officer of SVM Asset Management Ltd. in Edinburgh, which sold the last of its BP shares this month. “Investors would rather see dividends. A lot of shareholders would be critical about raising equity cash at this level.”
BP rose 1.2 percent to 308.25 pence in London.
BP, Exxon Mobil Corp. and Royal Dutch Shell Plc reduced share buybacks in the past few years in favor of dividends and investments in new drilling. The increase in oil prices to a record $147.27 a barrel in 2008 put more cash on their balance sheets as countries from Venezuela to Russia restricted access to oil reserves, creating a dilemma for companies looking to put their cash to work.
“Buybacks should send a message that the company thinks its shares are seriously undervalued,” said Ivor Pether, an analyst at Royal London Asset Management, which holds $9.2 billion in securities including BP shares. “They can also reflect a limited range of good investment opportunities, which is an issue facing the energy industry.”
Irrationally
Exxon reduced its number of shares outstanding to 4.7 billion last year from 6.1 billion in 2005. It held $166 million of its own stock in treasury at the end of last year, the value of which has dropped 12 percent, or $20 million, in 2010.
BP’s leak at its Macondo well illustrates the risk in reducing a company’s cash cushion.
For some companies, buybacks are a standard way to allocate cash and can be done “irrationally,” said Weiss. “Companies would be better off not buying back shares when prices are good,” he said.
BP paid an average of $11.27 a share in buybacks since 2005. Its London-traded shares slipped as far as 296 pence ($4.41) on June 25, the lowest since August 1996.
BP shares have tumbled since the April 20 accident on the Deepwater Horizon rig that killed 11 workers and started the leak. With oil still spewing into the ocean, BP credit-default swaps rose to a record 591.7 basis points last week, according to CMA DataVision.
Potential Costs
Aside from the $20 billion escrow fund, BP has $5 billion in cash, $5 billion in banking facilities and $5 billion in standby credit lines, according to Odone.
The company has obtained a further $5 billion from banks, according to two people familiar with the matter who declined to be identified because the arrangements aren’t public.
All companies operating in the Gulf of Mexico may need to rethink how to limit their liability and protect shareholders, said Ted Harper, who helps manage about $6.8 billion at Frost Investment Advisors in Houston.
Sold Holdings
“It’s a pertinent question for all boards, how do they address these risks going forward,” said Harper, whose dividend value fund sold all of its BP holdings a few days after the April 20 blowout because of uncertainty over the company’s potential liabilities. “The bottom line is that they’re probably not going to be able to direct as much cash to things like share buybacks as they might have otherwise.”
Exxon, which spent $2 billion repurchasing shares in the first quarter, and its peers may still generate cash beyond what can reasonably be invested in new drilling campaigns and capital spending, said Douglas Ober, who manages $550 million as CEO of Petroleum & Resources Corp. in Baltimore.
“They can’t put the money to work profitably in oil and gas ventures, and so they return the money to shareholders,” Ober said.
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