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AFTERMATH OF BP OIL SPILL: CORPORATE

ESSAY
FINANCIAL MANAGEMENT
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Contents
Introduction to Corporate Financial Management...........................................................................3

BP working for Sustainability.....................................................................................................4

Business models for shareholder value has come to an end...........................................................5

Balance Sheet...............................................................................................................................6

Discretionary Items......................................................................................................................6

The Bottom Line..........................................................................................................................7

Financial impact on BP....................................................................................................................8

Shareholder and financial Management..........................................................................................9

Review of BP...............................................................................................................................9

Reference.......................................................................................................................................10
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Introduction to Corporate Financial Management

It’s been know that in theory of financial Management includes all the basic consideration for
better investment and making up financial decisions and other policy valued details in aspects of
corporate finance .There’s been greater tendency of isolating decision based approach and
analyse them accordingly. To have a clear understanding ,if considering a capital budgeting rules
and other depended exogenous details on cost of capital .There needs to be a assumption in a
firm taking decision ,which is finance based and independent of decision taken at investment
end .There is further better consideration for a clear support on it separate view. [ CITATION
Ioa10 \l 1033 ]

To have practical generic view of financial prospects for generating stable market Corporate
financial management has been main back bone of approach. As the news of Oil Rig explosion
off the Louisiana coast (US), there were no consideration for facts that impact it would cause on
BP prospects and countries level and other environmental factor.

It has been rather been a praiseworthy approach the way compensation of $20 billion was set up
by BP was rather great confidence victory for company and the American Administration. The
BP engineers had a big task of addressing the technical problem and there has been greater
communication channel barrier due the effect oil spill sharpen up .Its was difficult task for the
BP to overcome this major oil spill with the best result and making its reputation unscathed.
[ CITATION Orw10 \l 1033 ]

There has been also experiences of controversies the way business level of work carried out by
BP .It had basic fault rate on side of environmental change and working environment of workers,
it was major industry which was producers of greenhouse effect gases .BP wanted to change it
history by becoming more environmental friendly and taking up alternative energy resources like
of ethics and compliance policies. The name of BP was changed due to change in aspect like
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beyond petroleum and rebranding. These rebranding was a greater signal for stakeholder to be
focused in maintaining better sustainability at financial level.

The company tried to assure concerned stakeholders that the environment was a serious matter
to them, and also assured to concentrate with a strong commitment and dedication. Still BP’s
work has not all the time matched with their terms. While competition in the energy market
started to strengthen and collaborations taking place, the organization’s assurance to become a
responsible ecological steward would definitely be questioned after some portions of the
company’s shares were sold off. . [ CITATION Reu10 \l 1033 ]

BP working for Sustainability

From the above discussion, BP launched an alternative energy resource work around in the year
2005 to enhance its image and preserve a sustainable option based on the market conditions. This
was small part of business investment option of around $1.4 billion and it wanted to go green and
increase its business and expand it over and around. It started up with Wind power having a
capacity of 500Megawatts and installed capacity of 432 watts in operations .In the year 2008 it
started its commercial full scale production and operation of wind farms which includes the
cedar Creek, in colardo having a 274 wind turbine. BP also has developed two of the largest
solar power plants in the world in Spain, projects that will supply some energy to up to a million
homes. In Wyoming, BP has introduced an original solar-driven pump scheme at the Moxa Gas
field location in view to decrease the greenhouse gas emissions contributing efforts globally.
Each of the 460 wells has two types of pumps: one pumps methanol whereas another works to
circulate the heated glycol so as to avoid the tool from freezing which is a persistent trouble in
the unkind fields located at Wyoming. [ CITATION Ren10 \l 1033 ]

The beginning of a new method of doing business could possibly be due to the finish of one
business representation. The objective of this post is to share the findings of recent failures, the
reasons why the shareholder valuation based business model era is coming to an end, while
proposing an alternate business model that builds of the successes of the last era while shaping
the future for the better.
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A business model for shareholder has come to an end:
Fundamentally, most businesses today that are listed on any stock exchange or privately held
across many directors exists to increasingly generate (or increase) shareholder value over time,
along with other things – like impact on the environment, do good and so on. The distinction to
be made is that this position of increasing share holder wealth is so ingrained in the psyche of
most organisations that all other decisions are evaluated, risks managed and evaluated against
this objective of maximising share holder wealth.[ CITATION Wil10 \l 1033 ]

Let’s look at BP – while the positioning and logo symbolically represent the world’s largest solar
company with environment friendly focus, their underlying goal quoted in many of internal
writings of BP is:
"The responsibility of a corporation to deliver sustainable shareholder wealth is a GIVEN. That will never change,
and must remain the fundamental driver of all business."

It is not my intention to single out BP, the other oil companies or the events to push for alternate
oil fuel but rather highlight the decision making process a company goes through and how
operating from this underlying premise of maximizing share holder wealth attributed to wrong
decisions for BP.[ CITATION Kin10 \l 1033 ]
Managing risks as part of doing business:  Risk management is the identification, assessment
and prioritization of risks followed by coordinated and economical application of resources to
minimize, monitor, and control the probability and/or impact of unfortunate events. All
companies, businesses and banks have a risk management process (usually teams) that lists of
risks, asses a risk probability and works out a risk mitigation plan. BP did as well and in due
course, the risk associated to deep sea drilling was low to near improbable. All the top oil
executives when questioned on capital hill  stated this as per multiple sources.[ CITATION
Ioa10 \l 1033 ]

"The heads of four of the country's largest oil companies told a House panel Tuesday morning
that the explosion of the Deepwater Horizon and subsequent oil disaster was merely a fluke.”
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They went through the process of asking what any of the other companies would do differently,
along with their risk mitigation plans. This level of production obviously throws off large
amounts of cash. In 2009, BP reported cash flow from operations of $27.7 billion. Of course this
doesn't equal free cash flow, but it does give an indication of the scale of the company.
[ CITATION Mou09 \l 1033 ]

This cash flow from operations, however, was based on recession level realized prices for oil,
liquids and natural gas in 2009. The company's average price realized was only $56.26 per barrel
for oil and liquids, and $3.25 per Miff for natural gas. In 2008, the company realized an average
price of $90.20 per barrel for oil and liquids, and $6 per Mcf for natural gas. BP reported cash
flow from operations of $38 billion in 2008 based on these prices. Many observers are looking
for oil prices to head back above $100 per barrel as the economy recovers, and this extra cash
would accrue to BP, and be used to pay any claims from the oil spill.[ CITATION Ren10 \l 1033
]

Balance Sheet

BP has a strong balance sheet to help it withstand the cost of the spill. BP also has cash and cash
equivalents of $6.8 billion as of March 31, 2010, that it can use to pay claims. This is lower now,
since the company has paid out more than $1 billion in claims so far, due to the accident .BP is
also under levered relative to its size and cash flows. The company had net debt of $25.1 billion
as of March 31, giving it a debt to equity ratio of 19%. BP not only has borrowing capacity, but
also has real producing oil and gas assets to use as collateral rather than empty office buildings
with an uncertain value like many other borrowers. [ CITATION Ren10 \l 1033 ]

Discretionary Items

BP has stated that its free cash flow is break even based on $60 per barrel oil. However, this is a
little deceptive, since BP has many discretionary cash expenditures that it can cut back on if cash
is needed to pay claims or legal damages. The company paid $10.5 billion in dividends in 2009,
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and is under no legal obligation to pay any dividends to its shareholders. [ CITATION Rog10 \l
1033 ]

BP spent $20 billion on capital expenditures in 2009, and budgeted another $20 billion in 2010.
In a worst case scenario, BP could spend only maintenance related capital expenditures, and free
up cash needed for claims and costs related to the spill. [ CITATION SEO10 \l 1033 ]

This is not a sound long-term strategy for an oil and gas company, as constant investment in
exploration and production projects are needed just to keep production flat. However, given the
choice between cutting discretionary capital expenditures and bankruptcy, BP could take this
route and free up more cash.

The Bottom Line

There is no way to estimate what BP's liability will be, and that has obviously led to the current
melt down in the stock price. If we use the Exxon Valdez oil spill as a guide, Exxon Mobil has
paid out $4.3 billion to settle claims related to this oil spill since 1989. Exxon Mobil agreed to a
civil settlement with the federal government and Alaska in 1991, and agreed to pay $900 million
over ten years, with a further $100 million added if late damage is found.[ CITATION cur10 \l
1033 ]

Although the BP oil spill is definitely larger and more serious than the Exxon Valdez, BP seems
to have the cash flows and balance sheet to withstand the costs, and will also benefit from the
number of years hat will pass before litigation is settled. In addition to its Alternative Energy
program, BP also has implemented environmental awareness programs in Britain to help
stakeholders understand the impacts of global warming and the importance of sustainability
issues.[ CITATION BP10 \l 1033 ]

There are likely to be many ramifications but let me state some of my early focuses:
• On the whole, the prototype in which BP and the vast business works requires modification.
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•Actions have been taken for improved security technology. An example of this is the fail safe
BOP, which this incident has clearly demonstrated is not failsafe.
• It needed to significantly enhance sub-sea intervention capability in the deepwater. BP intends
to play a key role in creating this, and we believe that our partners in the industry will join us.
• It is likely the industry will carefully evaluate its business model, to determine how BP can
work better with contractors to reduce the various risks associated with drilling operations.

Financial impact on BP

The financial impacts from the oil spill are extensive, from the huge response and cleanup costs,
to the legal expense and most importantly the loss of market value. Since the oil has started
reaching Gulf, the British oil giant has seen its “market value plummet from US$122 billion to
barely US$80 billion” [21]. After this event, BP’s shares have fallen by 34%, concerns about
sparking captures, and Britain’s Financial Times said . Like 5 July, BP’s expenses above the oil
spill of Gulf of Mexico “soared above three billion US dollars”. Predictions about the overall
expenses differ to great extent. For the fines, cleaning process and compensation altogether, BP
may has to bear with expenses of $US12 billion ($AUD14.2 billion), suggested by UBS. If the
spill occurs till August, the expenses could go up to $US22 billion which is estimated by an
analyst, Jason Kenney, working at ING Commercial.

The main risk of Deepwater disaster destroying BP is the mixture of ongoing leak and the scene
of large official expenses , believed by experts. This can lead to division of the 101 year old
organization employing 80,000 people, operating 22,400 gas stations and which generated
US$239 billion of profits in the previous year. [ CITATION Wil10 \l 1033 ]

• As of now BP has invested around $1billion in gross direct expenses for reaction, clean up and
respite wells. Doing this there can be a burden on financial management of BP, which by proper
actions in reducing the spills can be overcomed.
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• Paying up Fines and penalties in adding up to relief possibly.
• It would be difficult to take up measures and predict that future course .Hence long-term an
action is inevitable.
There would be an added responsibility on hands of stakeholders seeing a long term interests
depends on how they make up challenges after the incident:
• These include our 80,000 employees, of whom 30% are in the US; and
• The many investors in BP who depend on us in part for their financial security. Around 40% of

Shareholder and financial Management

BP shares have dropped nearly 20 per cent since the April 20 explosion that killed 11 workers
and sent the massive Transocean drilling rig, Deepwater Horizon, to the ocean floor. That has
wiped off nearly $US30 billion in value from BP's London shares – triple the market value of
Cameron International, which is responsible for supplying well head tool intended to avoid
blowouts. Around $US2.7 billion or nearly about 10 per cent of its business price has been spent
by Halliburton Co helping the cement the blown-out well in place. For this, BP and its 25 per
cent associate will have to mutually bear with the clean up expenses and damages equivalent to
their shareholdings with BP having 65 per cent of the expenses. [ CITATION Ren10 \l 1033 ]

BP is a large protection provider and amongst the Wall Street’s bigger underwriting clients
similar to fellow main oil manufacturers. According to Thomson Reuter’s information, in the last
five years, the company has exported $38 billion of debt producing hundreds of millions of
dollars in fees on 64 projects. The topmost underwriters ,UBS and Credit Suisse, rated BP shares
as a “buy” in the month of May following the disaster. [ CITATION Rog10 \l 1033 ]
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Review of BP

As in this assignment mainly concentrate how BP has taken up some crisis base decision which
made them have a balanced outlook in market sphere. In other sphere, it considers some of the
major issues which are mostly concerned mostly on negative effects concerning crisis outbreak.
It has taken financial based strategy where due governance and work based approach criteria
needs to be maintained for better workflow criteria .Hence BP from it hierarchical level has
taken up better financial approach and maintained a due contact with all its stakeholders and
making them aware of different step taken up by them in containing the oil spill. It also made up
due consideration by making environmental protecting measure and doing work accordingly.

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