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BP Faces Big Losses as Gulf Oil Disaster Worsens

June 1, 2010 at 12:00 AM EDT
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BP's stock value sunk Tuesday, following the failure of the "top kill" procedure to halt the oil leak over the weekend. Jim Lehrer talks to an energy consultant and management expert about BP's financial prospects as the crisis drags on.
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JIM LEHRER: We look now at what the disaster could mean for the future of BP, financially and otherwise.

Robin West is founder and CEO of PFC Energy, an energy consulting firm in Washington. Sydney Finkelstein is a professor of strategy and leadership at the Tuck School of Business at Dartmouth College.

Robin West, White House Press Secretary Robert Gibbs said today that BP has the financial resources to pay for whatever it takes to make this thing go back, or put it back where it was, to — to solve whatever this disaster has wrought. Do you agree?

ROBIN WEST, founder and CEO, PFC Energy: Well, I think there are two issues. One is, how do you clean up the mess? And then there are going to be all kinds of legal damages as well. The number could be enormous. BP is a rich, powerful company. But, depending on the penalties, the penalties could be tens…

JIM LEHRER: Could be like what?

ROBIN WEST: Well, it could be in tens of billions of dollars. BP can imagine $10 billion very easily, but $50 billion is real money to BP.

JIM LEHRER: Give us a feel for what real money is with BP. Give us the financial picture of BP.

ROBIN WEST: Well, BP is — until recently was the largest company in terms of market capitalization in Europe. They had cash flow north of $40 billion. It’s a very, very strong company.

It has assets all over the world. It’s a world-class company. But it’s a real challenge if you have to pay out this amount of cash. One of the things to keep in mind, though, is that a lot of these settlements, a lot of the — the legal issues will take years to settle. The — the bill doesn’t all come due on the first day.

JIM LEHRER: So, when it was reported today that BP has spent $1 billion thus far, put that in perspective.

ROBIN WEST: A billion dollars — they made $5 billion in the last quarter. They can manage…

JIM LEHRER: Five billion dollars the last quarter?

ROBIN WEST: Yes. They can manage a billion dollars very easily.

But, as I say it’s — $20 billion or $30 billion is a lot of money — $50 billion really hurts the company.

JIM LEHRER: Professor Finkelstein, what about reputation? What — what are the chances of — looking at it I realize from afar, but as an expert, what do you think the chances of BP’s reputation surviving this?

SYDNEY FINKELSTEIN, professor of strategy and leadership, Tuck School of Business at Dartmouth College: Well, the reputation of BP has taken an extreme hit, to be — to be sure, and all the oil industry, for that matter.

Can they survive this? Well, the truth is that the general public perception of big oil is not all that great to start with. So, in one way, they don’t have that far to — to fall. On the other hand, they — the reputation extends all sorts of other stakeholders, including debt-holders, including shareholders, including customers, and especially the government.

And when — when you’re seen to not being able to take care of your own house, the government is pretty quick to step in to come up with some solutions of its own. And some of those could be costly.

JIM LEHRER: Are there any examples from past experiences like this that could — that might be relevant to BP’s situation?

SYDNEY FINKELSTEIN: Well, unfortunately, there are plenty of other examples of corporate disasters and — and breakdowns.

You can go to a very famous business school case study now, the Tylenol story and J&J. And when Tylenol was — had their capsules contaminated on the shelves, J&J moved very quickly to remove everything. And it was considered the way to do it. Take the short-term financial hit, I think, is lesson number one, be willing to — and it looks like BP has been so far — be willing to take that hit.

On the other hand, there’s other examples. There was a company in Japan called Snow Brand, which is in the milk industry. And they were the number-one brand in the milk business in Japan for decades. And they had contaminated milk products on their shelves. And they kept it a little bit too long. And in the end, that reputational hit cost them, the company.

Now, milk is not the same as oil, to be sure. But I think there will be a reputational hit. And I think there are some other examples. Actually, we should even mention Union Carbide with that horrible Bhopal disaster. And, in that case, thousands of people died, and, yet, Union Carbide, damaged, to be sure, but kept on going.

But it does create some vulnerabilities in a lot of different ways, not the least being your own position in the industry, and whether you might even become a takeover candidate yourself.

JIM LEHRER: Do you agree with that, Robin West, that, within the industry, there’s a problem here, too?

ROBIN WEST: Oh, I think so. I think that this has hurt the industry somewhat.

And I agree with Professor Finkelstein that one of the real risks is what we call license to operate, which is the — the confidence of the public which permits you to go about your business. And BP and all these oil companies, they operate all over the world. And it’s not just the U.S. government. It’s governments everywhere.

And they have to have their confidence. And, without that, they can’t function.

JIM LEHRER: What about Exxon and the Exxon Valdez oil spill? We all know about that, but Exxon is still in business now, many years later. What is the difference? Or how did they handle it and how were they able to survive it?

ROBIN WEST: Well, Exxon, the first thing, Prince William Sound, it was a terrible disaster, but it’s nothing like the Mississippi Delta, which is arguably the greatest marine spawning ground in the world. And a lot more people’s lives were affected. This has gone on longer.

Exxon Valdez was a tanker spill. All the oil just went out. But I think that — that Exxon regained the confidence of people because they have such strong operating standards. They have such a strong balance sheet. And everybody in the industry knows that, essentially, they’re a very well-run company.

JIM LEHRER: Professor Finkelstein, there’s also been suggestions that — that companies like BP have been compared to, say, the tobacco companies. They — when tobacco became a no-no, they just changed their name, so they’re no longer the Wawa tobacco company. They’re something else.

Is it possible that BP could be — it’s the name problem, and one way to solve it is to change the name or change the structure in some way, or to sell off assets, that sort of thing?

SYDNEY FINKELSTEIN: Well, changing the name is certainly a cynical ploy, to be sure, to deal with a reputational loss. But, as you say, it’s happened.

I don’t really think that’s going to be — that’s going to happen here. As we just heard, BP is a gigantic company, operations around the world. They’re really big. And they have very, very deep pockets. They’re going to pay a big — a big price. They’re going to pay a reputational price.

But to me the key is about culture and integrating safety and safety as a top priority. Remember, BP was also the company that had that terrible explosion in Texas City back in 2005 that killed people. Their recent track record is not all that — not all that great.

And I think one of the things we can see in terms of looking at other companies that have recovered from these situations, at least a little bit, they really have emphasized safety. They built it into the culture. It doesn’t just become a buzzword, but it becomes something people talk about day after day after day and begin to believe in it. And I think that’s going to be essential for BP, much more important than — than changing the name.

JIM LEHRER: Robin West, what about the stock price, as we reported at the beginning here, that it’s down almost a quarter of its stock price, BP is? And it lost 15 percent, another 15 percent today on the New York stock markets. When does that become a problem?

ROBIN WEST: Well, right now, there are those analysts who buy recommendations on BP stock. They believe that the underlying value is so enormous. It’s a very…

JIM LEHRER: You mean this is oil in the ground, that sort of thing?

ROBIN WEST: Yes, and cash flow.

ROBIN WEST: They’re still making a lot of money in the Gulf of Mexico, aside from this. And they’re making money all over the world. Again, this is one of the biggest, richest companies in the world.

But I think Professor Finkelstein is right that the — that, in the long term, I think, increasingly, what is going to happen is that companies that have big balance sheets and strong operating records are going to be the ones that are going to have this license to operate, to be able to have the support of the public and governments. And that’s critical. And I think BP is going to have to work hard to recover that reputation.

JIM LEHRER: And where — what is the spillover to the rest of the industry?

ROBIN WEST: Oh, I think it’s very serious for the industry. And I think that the industry, there was what happened around the blowout itself. Then you have trying to stop the spill. And then you have the preparations — or lack of preparations, really — for the cleanup from the spill.

And I think that the spill cleanup is the thing that I think a lot of people in the industry have been very sobered. Even companies that are extremely well run that, as Professor Finkelstein says, have a very, very strong culture, nobody really thought this was going to happen. People are just shocked this is going to happen.

And, as a result the safety, the standby mechanisms, the skimmers and the use of dispersants and everything like this, this is old technology. This is not — going into deepwater technology is some of the most advanced technology on earth at anything. It’s like going to the moon. But that same level of technology has not been applied to cleanup and spill cleanup. And that’s one area that the whole industry has got to focus on.

JIM LEHRER: OK. Robin West, Professor Finkelstein, thank you both very much.