Financial Future Of British Petroleum - Term Paper Example

Financial Future Of British Petroleum British Petroleum, one of the leading oil companies in the world has recently caught the attention of the world because of the Gulf of Mexico oil spill which damaged which is believed to be the biggest accident happened in the petroleum industry. This accident or oil spill started from a sea-floor oil gusher on April 20, 2010, resulted in a Deepwater Horizon drilling rig explosion killing 11 men working on the platform and injured 17 others. The oil spill continued for around 3 months before it the leak was closed on July 15, 2010. It is believed that about 4.9 million barrels ^ of crude oil spilled over the water from this accident destroying the marine and wild life near the Gulf of Mexico. It also affected the tourism and fishing industries in this region and most of the countries including United States blamed BP for this accident which forced BP to give a huge amount as compensation for the cleanup and rebuilding process of this region. “The U.S. completed negotiations with BP Plc to establish the $20 billion fund that will compensate victims of the Gulf of Mexico oil spill” (Blum & Snyder). 20 billion dollar is a huge amount for BP and such a huge amount given as compensation caused severe financial problems in BP and the company is currently on the verge of bankruptcy. BP forced to appoint a new CEO in their last minute effort for survival. This paper is trying to answer the questions like; where BP stands on the market now, where it is going and where it might end up. BP plans to sell assets for up to $30 billion over the next 18 months, primarily in the upstream business, and selected on the basis that they are worth more to other companies than to BP. This portfolio high grading will leave the company with a smaller but higher quality Exploration & Production business. The company said it was taking a prudent approach to managing the balance sheet and its financial liquidity, in order to ensure that BP has the flexibility to meet all of its future financial obligations. As a result it plans to reduce its net debt level down to a range of $10-$15 billion within the next 18 months, compared to net debt of $23 billion at the end of June (BP Sets Out Gulf of Mexico Costs, Further Asset Sales and Strong Operating Performance) BP is currently doing everything possible to stay in the market. It is not in a position to utilize some of its projects effectively because of their weak financial abilities at present. BP has realized that some of these projects can be managed more effectively by others and the market value of these projects are more than what BP would be able to derive out of it. At the same time it doesn’t mean that BP is closing down the entire new projects. They are selling out only those projects which are unmanageable by BP at present. On the other hand, they are on the lookout of new business opportunities, in countries like Azerbaijan, Egypt, China and Indonesia. BP has realized that their financial conditions are not so good and implementing policies to reduce the debt levels of the company. Earlier BP had no problem in maintaining a higher level of debt because of their fixed assets. But the heavy amount supplied as compensation for the Mexico oil spill victims forced BP to sell out a substantial volume of its assets. Since the leap is now capped, BP is breathing more confidently now. If the leak continued for another couple of months, BP would have been collapsed completely. But the success of closure efforts of the leaked valve has given more confidence to BP now. On 27 July, 2010 BP announced that it is going to replace Tony Hayward with Robert Dudley as the chief executive of BP from October 1, 2010 onwards (BP CEO Tony Hayward to Step Down and be Succeeded by Robert Dudley). BP director board believes that Dudley would help BP to come out from this drastic situation because of his immense experience in oil industry dealing with toughest situations. BP believes that they can pay the full amount of the direct spill response costs by the end of this year and the remaining costs can be paid partly in the coming years. Even though BP faced severe problems in the Gulf of Mexico, the global business of BP attained new heights in other parts of the world which is definitely an encouraging sign for BP. Higher prices of oil is a positive sign for BP in their efforts to survive. In refining and marketing, BP expected to maintain its market share. “BP’s underlying second quarter downstream result was the strongest since Q2 2006, when refining margins were more than double current levels, with the US business returning to profitability for the first time in over a year” (BP Sets Out Gulf of Mexico Costs, Further Asset Sales and Strong Operating Performance). Higher cash flow will enable BP to reduce its debt. Under the leadership of the new CEO, Dudley, BP has already started negotiations with the banking executives for additional bank borrowing facilities. Even amidst the Mexico oil crisis, BP is continuing with the merger and acquisition strategies to strengthen its wings. On 15 July 2010, BP and Verenium Corporation announced an agreement for BP Biofuels North America to acquire Verenium's cellulosic biofuels business, including the Company's facilities in Jennings, LA and San Diego, CA for $98.3 million. This agreement should give both companies the flexibility to pursue the growth opportunities in the respective businesses and achieve goals in the near-term. (BP And Verenium Announce Pivotal Biofuels Agreement) The above acquisition clearly shows that everything is not lost for BP now. They are still a force in the oil industry and they have still the potential to acquire small companies. To conclude, in all probabilities, BP will emerge out from the current crisis situation under the leadership of the new CEO Dudley. Works Cited 1. Blum, Justin & Snyder, Jim. “BP, U.S. Agree on Establishment of $20 Billion Gulf of Mexico Spill Fund.”. 2010. Web. 15 December 2010. 2. “BP CEO Tony Hayward to Step Down and be Succeeded by Robert Dudley”. 2010. Web. 15 December 2010. 3. “BP Sets Out Gulf of Mexico Costs, Further Asset Sales and Strong Operating Performance.” 2010. Web. 15 December 2010. 4. “BP And Verenium Announce Pivotal Biofuels Agreement .”2010. Web. 15 December 2010. Read More