BP chief under pressure to boost share price

BP chief executive Robert Dudley's task of lifting the share price after the Gulf of Mexico disaster is gaining urgency as the company falls further behind Royal Dutch Shell.

BP's market value is about £43 billion ($89.9 billion) lower than its rival, the widest gap since the height of the crisis on June 30.

The Hague-based Shell, Europe's largest oil company, has gained 5.2 per cent this month, while BP shares have risen 0.2 per cent. BP was worth more than Shell as recently as January.

The sluggish performance puts pressure on Dudley to follow through on pledges to sell US$30 billion ($39.8 billion) of assets and to start paying dividends again. Investors will abandon BP if he fails, reigniting speculation that the London-based company will be split up or taken over.

"BP is held by a lot of private investors and pension funds because of the dividend," says Colin McLean of SVM Management. He sold all his BP shares this year. "If Dudley doesn't pay it, the stock price will go lower and they'll be more vulnerable."

Tony Hayward, Dudley's predecessor who lost his job because of the Gulf spill, cancelled BP's 14UScps dividend for the first three quarters of this year to free up cash to pay for cleanup and compensation. Dudley said the board would meet before the end of the year to consider restoring the dividend "in some form" for the fourth quarter.

In the future, "the reason for any potential takeover would be if Dudley doesn't bring back the dividend", said investment analyst Iain Armstrong. "He's almost promised it, and if he doesn't deliver, the stock will fall and the Chinese will be hovering over it."

BP has a history of giving back more money to shareholders than competitors. The dividend yield, or annual return from the dividend compared to the price of the shares, was 6 per cent on April 20, the day of the Gulf accident and the highest share price this year.

That compared with a dividend yield of 5.2 per cent for Shell and 2.4 per cent for Exxon Mobil.

"The expectation is for the dividend to return in the first quarter, the question is at what level it would come back," said fund manager Ivor Pether.

Higher oil prices will bolster earnings for both Shell and BP. The price of crude in New York trading has gained 10 per cent since the end of May to $81 a barrel.

BP reports third-quarter earnings on November 2, and Shell publishes results this week. Excluding one-time items and inventory changes, BP's profit will be US$4.8 billion, down 11 per cent from US$5.4 billion a year earlier. Shell's profit will be US$4.4 billion, up 33 per cent from US$3.3 billion last year.

"BP experienced an impact on volumes from the Gulf moratorium," Pether said. "Production will be down year on year, whereas the rest of the majors should show some production growth. Shell looks like a reasonable value and it doesn't have the uncertainty that BP has."

Shell chief executive Peter Voser has accelerated asset sales of as much as US$8 billion, shed jobs and reduced exposure to the less profitable downstream business by selling refineries.

Shell is also boosting production by targeting hard-to-reach rock formations and focusing investment on the Asia Pacific region, where demand growth is stronger than in the US or Europe.

BP shares dropped to a 14-year low of 302p ($6.32) on June 29 and bondholders priced in more than 40 per cent chance of default at the height of the disaster, prompting speculation that the company would be taken over.

The stock has recovered 42 per cent since that low after BP set up a US$20 billion compensation fund with the US Government and set aside US$32 billion for spill costs in the second quarter.

BP this month brought the total amount of cash raised from asset sales higher than US$11 billion by selling operations in Vietnam and Venezuela to its Russian joint venture partner TNK- BP for US$1.8 billion. It has also disposed of fields in the US, Canada, Egypt, Colombia and Malaysia.

Just before taking the reins on October 1, Dudley unveiled a reorganisation of BP's business, announcing the departure of the head of the exploration and production unit, Andy Inglis, and splitting it into three. He also established an independent safety division.

Those measures won't affect whether the US finds BP was negligent in the accident. The ruling will determine the size of the fine under the Clean Water Act, which could run as high as US$17.6 billion, and whether BP's drilling partners pay a share of the costs.

A probe by US Attorney-General Eric Holder may lead to suspension of well operating licences and debarment from government contracts under US pollution law, BP said in July.

That's going to weigh on BP shares for a while, even if the company isn't a target for larger rivals such as Exxon, Shell, or China National Offshore Oil, said analyst Dougie Youngson.

"Dudley has a lot to do, and I'd like to see some big statements about strategy to give some confidence that he can turn things around."

- BLOOMBERG