Friday, June 18, 2010

BP - Keeping an Eye on 2010 Executive Bonuses

Updated to July 26th, 2010

Under pressure from United States lawmakers and the White House, British Petroleum agreed to set up a $20 billion escrow fund over the next three and a half years to cover claims for compensation resulting from their blowout in the Gulf of Mexico that is now releasing up to 60000 BOPD into the environment. Personally, I liked it better when it was only flowing 5000 BOPD but apparently, that number was drawn out of thin air.

BP will make payments of $3 billion in the third quarter and $2 billion in the fourth quarter of 2010. These initial payments will be followed by payments of $1.25 billion for each of the following quarters until the total of $2o billion has been reached. While the fund is building, BP will pledge some of their United States assets as a guarantee. In addition to setting up the fund, BP has agreed to pay $100 million to oil rig workers who are now out of work because of the moratorium on drilling in deep water. Lest these numbers sound astronomic, it's important to keep in mind that BP's net income for the first quarter of 2010 was $6.079 billion and their net income for all of 2009 was $16.578 billion, down from $21.157 billion in 2008.

To finance the fund, BP agreed to suspend its planned dividend payment from the first quarter of 2010 due on June 21st. As well, dividends for the second and third quarters of 2010 will also be suspended; in 2011, the Board will reconsider reinstating dividend payments based on the situation in the Gulf. It is estimated that the suspension of dividends will save BP an estimated $10 billion on an annual basis; during 2009, they paid out $10.899 billion in dividends. What seems a bit off about their decision to cut the dividend is that none of the ecological debacle in the Gulf was in any way the fault of their now much beleaguered shareholders. It appears that the media and the White House have already laid the fault for the spill at the feet of BP's corporate culture but I guess everyone shares in the misery.

In addition, the company has over $10 billion in credit available from banks. BP will also reduce capital spending and increase their asset divestment program over the next twelve months to raise approximately $10 billion to help pump money into the escrow fund.

One thing that the American government, the White House and BP itself have not discussed taking action on is BP's bonus program for its executives and directors. From their 2009 Director's Remuneration Report, I have taken the following screen cap showing details of BP's remuneration program for Executive Directors:

You can see that their bonus program and performance shares program can be a pretty sweet deal. The Group Chief Executive, one Tony Hayward, can collect up to 5.5 times his annual salary in perfomance shares and one third of his actual on-target bonus of up to 150% of his salary in additional shares matched one for one if they reach a safety and environmental performance standard. I think we can write off the one for one matching based on safety and environment standards this year, don't you?

As I have before, let's take a quick look at Dr. Hayward's BP share holdings from their 2009 Annual Report.

Here is his salary (and that of the other Executive Directors in case you care):

Here are his performance share holdings:

Last but not least, here are his share options:

Here's the chart today showing the BP's performance on the London Stock Exchange (priced in pence):

It's readily apparent that with today's price of 408.50 pence that all existing options and performance shares for all of the Executive Directors are WAY out of the money. It does give some idea of how lucrative the performance share package can be if the issue price is low enough. Dr. Hayward holds a total of 2.36 million performance shares; if the stock were to rise to 700 pence as was targeted, he'd be sitting on a nice pile of notes.

What is also apparent is that BP is now trading at a multi-year low. Should the remuneration committee at BP decide that now (or soon, or at least while their stock price was depressed) was a good time to issue some options to their Directors, Executive or senior management, it could be a very lucrative move for all involved. The lower the issue price the more volume the director gets upon issuance. As well, it's a buy low sell high philosophy. For example, if Dr. Hayward were issued performance shares equivalent to even four times his annual salary of 1.045 million British pounds, he would receive 4.18 million British pounds worth of shares. At today's price of 359 pence, he'd get 1.16 million shares. If the price of BP stock were to rise to its normal pre-blowout trading price of 550 pence, he would stand to rake in a cool 2.22 million British pounds (about $3.38 million Canadian). If he got the full 5.5 times his annual salary, the take would be 3.06 million British pounds or $4.6 million Canadian holding all else equal. That's why it's so advantageous for executives to issue options when stock prices are depressed.

It will be interesting to see if the White House puts pressure on BP to avoid this exact situation as the anger builds, the days roll by and the oil coats the beaches.

...and just in case we forget, Petroleo Brasileiro SA, Brazil's state-controlled oil company, is currently drilling a well in the Gulf of Mexico in 8850 feet of water, nearly 4000 feet deeper than the BP well. Shell and ChevronTexaco have drilled wells in water over 10000 feet deep. It was just a matter of time until there was a catastrophic accident.

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