Oil company BP PLC shied away from spearheading any industry rush back into the Gulf of Mexico as it revealed Tuesday that the cost of its devastating oil spill has jumped to $40 billion — taking the shine off a return to profit in the third quarter.
Chief Executive Bob Dudley was forced to raise the likely cost of the worst accidental spill in U.S. history by $7.7 billion because of delays to the final capping of the busted Macondo well.
That dragged down third quarter net income by more than 60 percent compared to a year ago, to $1.79 billion from $5.3 billion. But underlying replacement cost profit — a key industry benchmark that excludes the one-time cost of the spill — came in at $5.5 billion, beating analysts' forecasts of $4.6 billion.
Several residents along the Gulf Coast were happy to see BP turning a profit, keeping the company afloat so it can live up to its promise to compensate those affected by the spill.
"I don't think it's to anyone's advantage to see BP go broke or go out of business," said Byron Encalade, the president of the Louisiana Oystermen Association whose oyster beds are all dead or dying. "We want them to stay right and keep making money. All we want is for them to take care of the people who have been affected and their livelihoods destroyed."
Thousands are suffering from a summer of lost revenue after the April 20 explosion on the Deepwater Horizon rig that killed 11 workers. Oil kept gushing until July 15, and it took BP another two months — until Sept. 19 — to completely seal the well.
More than six months after the spill, tar balls continue to wash up on some beaches across the coast, while BP contractors have begun a large scale effort to clean remaining oil buried in the sand. Most beaches are open, but businesses who depend on tourists have lost their much-needed summer revenue that carries them through the slower winter months. They are now struggling to get by as they wait on their compensation checks from BP.
BP has pledged to make amends, promising certain Gulf assets as collateral for a $20 billion fund - overlooked by the U.S. government — to pay claims, but the London-based company's longer term plans for the Gulf remain open to speculation.
Dudley, who was presenting his first quarterly earnings report since taking over from gaffe-prone Tony Hayward a month ago, said BP was committed to operating in the Gulf following the lifting last month of a U.S. government moratorium on drilling.
But he said the company would "step back" and look at its equipment and rigs in those waters before attempting to jump back in, suggesting it may turn to its ventures elsewhere in the world to provide growth for a while.
"It wouldn't be sensible for us to be the first one to raise our hand and rush in with a permit," Dudley said. "We are still embedding the lessons from this incident ... we are going to take our time and be absolutely thorough and rigorous about this."
Chevron and Shell have both submitted requests for projects since President Barack Obama lifted the drilling moratorium on Oct. 12, but new regulations, which include more rig inspections, are expected to make it harder for companies to obtain offshore drilling permits.
"Broadly, I expect the industry to get back to work sometime in 2011," Dudley said, noting that new regulatory requirements for licenses were still under discussion.
Wells in the Gulf can be very profitable and taxes and royalties in U.S. waters are considered to be much lower than elsewhere in the world. Drilling projects there typically break even when oil sells for $50 to $60 per barrel. It's currently trading near $82 per barrel.
There has been speculation that BP will be particularly targeted in a tougher regime in the Gulf but Dudley said he had received no such indications from the U.S. administration.
He declined to comment on the status of the deepwater rigs it has on lease in the Gulf, or its production forecast from the region, which accounts for around 10 percent of BP production.
Fergus McLeod, BP's head of investor relations, said that production in the Gulf was down 65,000 barrels a day because of the moratorium and adverse weather.
"You expect that effect to get bigger actually in the fourth quarter because of course the drilling moratorium is affecting the whole industry ... and there's the normal process of well declines and some well failures across all operators."
The company last month sold sold its stake in four mature oil and gas fields in the Gulf to Marubeni Oil and Gas for $650 million as part of its plans to raise $30 billion by the end of next year as a war chest for future costs. The company is already halfway to that target with sales agreements in place for around $14 billion of assets.
Dudley repeatedly declined to go into more detail on the company's strategy for the Gulf, saying he would provide a full run-down when he presents fourth-quarter earnings in February.
The new CEO has already announced a restructuring of the company's exploration and production unit into three parts and the creation of a new unit to police safety practices.
"What I can report today is that BP is now in recovery mode," Dudley said. All the other major oil companies, except Chevron, have reported stronger third quarter profits thanks to higher oil and gas prices.
Dudley has been working to rebuild BP's shattered reputation, particularly in the United States, and turn around a 35 percent rout in the company's share price since the Gulf explosion.
The stock was 1.6 percent higher 430.65 pence ($6.90) in afternoon trading on the London Stock Exchange.
Evolution Securities analyst Richard Griffith said he was maintaining a "buy" recommendation for the company, with a target price of 510 pence, "as we believe the true liability for the Macondo accident to be nearer $25 billion to $30 billion as opposed to the around $60 billion the market is discounting."
BP has so far spent $11.2 billion dealing with the spill, and said Tuesday that daily running costs of $40 billion were beginning to slow.
It still faces a fine of up to $1,100 under the Clean Water Act for each barrel of oil spilled, but Dudley said the company was working on the assumption that it would not be found grossly negligent "and we are not provisioning for that."
Its own investigation into the accident admitted a share of the blame, but also laid responsibility on Transocean, which owned the drilling rig, and contractor Halliburton. It has also billed minority partners Anadarko Petroleum Co. and MOEX Offshore nearly $4.3 billion for their share of the accident — they have so far refused to pay.
BP said the board would consider whether to restore the company's dividend payment to shareholders — the company scrapped the payment for the first three quarters of the year to free up cash for spill costs and to ease political and public pressure — before it announces full-year results in February.
"No decision will be taken until then, but the improving financial condition of the company and the strength of our disposal proceeds are encouraging," said Chief Financial Officer Byron Grote.
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