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US: BP's U.S. chief faces more grilling in Congress

by Shawn McCarthyThe Globe and Mail
September 9th, 2006

It's Round 2 Tuesday for Robert Malone, BP PLC's recently installed chief of U.S. operations, as he struggles to restore the company's battered reputation in its biggest market.

After a gruelling appearance before a House of Representatives committee in Washington last week, Mr. Malone is set to return to Capitol Hill today to be grilled by the Senate energy committee over the emergency shutdown of BP's Prudhoe Bay pipeline.

The early August shutdown sent North American petroleum prices sharply higher in the midst of the summer driving season stoking outrage from members of Congress, who were already facing voter discontent over record gasoline prices.

There's plenty of fodder for senators who might choose to beat up on a foreign-owned, multinational oil company in a congressional election year.

 From its failure to detect corrosion in the Alaskan pipeline, to recent allegations of price fixing in the propane market, to the April, 2005, explosion at a Texas refinery, BP's U.S. operation has careened from crisis to crisis, prompting critics to charge that it is a company that puts cost cutting ahead of safety, and profits ahead of propriety.

Backed by highly respected BP chairman John Browne, Mr. Malone has sought to assure analysts and investors in addition to members of Congress that the company remains committed to operational excellence and is working diligently to address its U.S. problems.

And despite the setbacks, analysts suggest BP has seen little impact on its financial performance, although its stock has lagged other major oil companies.

Since May, BP shares have slumped 17 per cent, amid buoyant oil prices, from a high of $76.85 (U.S.) to Monday's close of $64.89.

Many analysts argue that BP shares are now undervalued and rate the company a buy for long-term investors, although they expect further volatility in the short term as the company is subjected to further congressional and regulatory hits.

Fadel Gheit, an analyst with Oppenheimer & Co., said the BP miscues are already reflected in the stock price. He added that any punitive measures Congress may impose could be easily absorbed by a company the size of BP, which earned $21-billion (U.S.) on revenue of $247-billion last year.

"I don't see anything going forward, unless there is a big skeleton in the closet, that would have a significant impact on the bottom line," the Oppenheimer analyst said in a telephone interview. "Anything of significance has to be in the billions of dollars for a company like BP."

Mr. Gheit was among a group of analysts and investors who met in New York a few weeks ago with Mr. Browne and Mr. Malone, a long-time BP Alaska hand who was elevated in July to head the company's U.S. operation.

He said their message was: "This is not BP; this is unlike BP, this is not our culture or business model. And we will fix it and not allow it to happen again."

Analyst Richard Griffith of Evolution Securities PLC in London argues that the market has overreacted to BP's U.S. problems, including the pipeline shutdown and the delay of production at its deepwater Thunder Horse project in the Gulf of Mexico.

"The share price trend suggests that BP's earnings and cash flows are expected to be undermined considerably by these events in the U.S.," Mr. Griffith wrote in a report last week.

He calculated that the Prudhoe Bay shutdown, in the worst case, would shave 1 per cent off 2006 earnings, while the Thunder Horse delay could reduce 2007 earnings by just over 2 per cent. "Neither of these events merits the recent share price decline that has wiped $40-billion off the market capitalization since April," he said.

Mr. Gheit acknowledged that BP paid a hefty price when it was forced to close the Prudhoe Bay pipeline to repair corrosion problems, shutting in 400,000 barrels of oil a day this summer. The company has since restored delivery of about half that amount, but BP is still forgoing 70,000 barrels a day of production, its share of the Prudhoe deliveries, at a cost of about $1-million a day.

Conversely, the company benefited when the news of the Prudhoe Bay problems drove up crude oil prices in an already tight market. On an annualized basis, BP earns an additional $400-million for each 1-cent increase in price.

It remains unclear what, if any, penalties BP will face once the various congressional committees conclude their hearings.

Pete Domenici, chairman of the Senate energy committee, said he wants to examine what impact the Prudhoe Bay closing had on the U.S. energy markets, and "to ensure that problems like this don't happen again." At the same time, House energy watchdogs are planning further hearings after saying they were dissatisfied with BP's responses last week.

Industry observers worry that Congress could mandate a tougher regime of regulatory oversight for pipeline companies. There are also questions about whether the large spill from BP's pipeline in March could deter Congress from opening up fragile wildlife areas or offshore locations to drilling.

Mr. Malone will have to satisfy his congressional interrogators that BP's big mergers it took over Amoco Corp. in 1998 and aggressive cost control don't make breakdowns inevitable.

"When you're meshing these systems together and trying to save costs at the same time, you're actually asking for these sorts of problems," said Matt Simmons of Houston-based energy investment bank Simmons & Co. "It's hard to be the best cost cutter in the business and to be good at maintenance.





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