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BP Stops Dividends, Pledges Asset Sales to Finance Obama’s Oil-Spill Fund

by on June 16, 2010

By Brian Swint June 16 (Bloomberg) — BP Plc canceled three quarterly payments of its $10 billion-a-year dividend after President Barack Obama demanded it put up cash for victims of the Gulf of Mexico spill. BP said it will reduce expenditures and sell more assets than planned to free up cash. The previously announced first-quarter payment due on June 21 will be canceled, it said in a statement today. No dividend will be paid for the second and third quarters, BP said. We “are confident that the agreement announced today will provide greater comfort of the citizens of the Gulf coast and greater clarity to BP and its shareholders,” Chairman Carl- Henric Svanberg said after a meeting with Obama in Washington today. Svanberg and Chief Executive Officer Tony Hayward agreed to set aside $20 billion over several years to compensate victims of the spill after Obama in an Oval Office address yesterday called for the creation of a fund. “We’ve sorted out a lot of the uncertainty, and that’s what the market didn’t like,” Peter Hitchens , an analyst at Panmure Gordon & Co. in London, said in a telephone interview. “This is a painful measure, but the market has got used to the idea.” ‘Not as Bad’ BP’s American depositary receipts were up 45 cents to $31.85 in New York trading. Earlier they touched $33. The shares are down 46 percent since the April 20 explosion aboard the Deepwater Horizon drilling rig that killed 11 workers and triggered the oil spill. “Now that everyone is on the same side, it should restore confidence,” Panmure’s Hitchens said. “BP’s not the winner, but it’s not as bad as some people thought.” BP’s payments accounted for about 14 percent of all dividends in the U.K.’s benchmark FTSE 100 stock index last year. Fitch Ratings yesterday lowered BP’s credit score by six grades to BBB, two levels above junk, on concern costs will escalate. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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BP Cancels Dividend to Set Aside $20 Billion for Spill-Compensation Fund

by on June 16, 2010

By Brian Swint June 16 (Bloomberg) — BP Plc canceled three quarterly payments of its $10 billion-a-year dividend after President Barack Obama demanded it put up cash for victims of the Gulf of Mexico spill. The previously announced first-quarter payment due on June 21 will be canceled, it said in a statement today. No dividend will be paid for the second and third quarters, BP said. We “are confident that the agreement announced today will provide greater comfort of the citizens of the Gulf coast and greater clarity to BP and its shareholders,” Chairman Carl- Henric Svanberg said after a meeting with Obama in Washington today. Svanberg and Chief Executive Officer Tony Hayward agreed to set aside $20 billion over several years to compensate victims of the spill after Obama in an Oval Office address yesterday called for creation of a fund. BP said it will reduce capital expenditure and sell more assets than planned to free up cash. “The dividend is off the table,” said Alastair Syme , an oil and gas analyst at Nomura Holdings Inc. in London, before the announcement. “Until they have some clarity on the costs of the spill, they can’t do anything.” BP’s payments accounted for about 14 percent of all dividends in the U.K.’s benchmark FTSE 100 stock index last year. Fitch Ratings yesterday lowered BP’s credit score by six grades to BBB, two levels above junk, on concern costs will escalate. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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BP Likely to Suspend Dividend as Obama Demands Clean-Up Fund, Analysts Say

June 16, 2010

By Brian Swint June 16 (Bloomberg) — BP Plc will suspend its $10 billion dividend as President Barack Obama ’s demand to set aside cash for the Gulf of Mexico spill stretches the company’s finances, analysts said. “The dividend is off the table,” said Alastair Syme , an oil and gas analyst at Nomura Holdings Inc. in London. “Until they have some clarity on the costs of the spill, they can’t do anything.” BP Chairman Carl-Henric Svanberg will meet Obama at the White House today to discuss how to compensate victims of the spill after Obama in an Oval Office address yesterday called for creation of a fund. Lawmakers, who will question Chief Executive Officer Tony Hayward tomorrow, have said the company should suspend the dividend and put $20 billion in an independently administered escrow account to pay claims. Bloomberg forecasts show that BP is unlikely to pay a cash dividend in the second and third quarters. BP’s payments accounted for about 14 percent of all dividends in the U.K.’s benchmark FTSE 100 stock index last year. Fitch Ratings yesterday lowered BP’s credit score by six grades to BBB, two levels above junk, on concern costs will escalate. “Hayward’s response to the president is very important, and the dividend could be fairly easy to give,” said Gudmund Halle Isfeld , an analyst at DnB NOR ASA in Oslo. “If I were an investor, I would say it’s okay to suspend the dividend for a quarter or two to ensure the company gets through the storm.” BP spokeswoman Sheila Williams said no decision on the second-quarter dividend has been made. Fitch said it would be “surprised” if BP didn’t suspend the quarterly payout until the full costs are known. Cleanup and liabilities may reach $40 billion, Standard Chartered Plc estimated last week. ‘Lack of Access’ “It’s not financially obvious how they could set up an escrow, given their credit rating and lack of access to credit markets,” Nomura’s Syme said. “It’s in the interest of BP to do something rather than nothing but they’re constrained by liquidity.” Credit investors are pricing in a more than 39 percent chance BP will default within five years. The rising risk implied by credit-default swaps is up from 7 percent a month ago, according to CMA DataVision. BP had $5 billion of cash available , $5.25 billion of credit lines it hadn’t used and another $5.25 billion of stand- by bank facilities, BP said in an investor conference call June 4. Fitch said yesterday it expects BP’s lenders to allow the company to use the credit lines if needed. BP generated $27.7 billion in cash flow from operations last year and posted profit of $6 billion in the first quarter. Capital spending will total about $20 billion the company said in this year’s strategy presentation. Cleaning Up The company has spent about $1.6 billion on containing and cleaning up the spill so far. If BP maintains its dividend this year at the 2009 level the dividend yield, or annual payout as a percentage of the current share price, will be more than 10 percent. That compares to 2.8 percent for Exxon Mobil Corp. and 5.9 percent for Royal Dutch Shell Plc. “BP has the strength of balance sheet and free cash flow to sustain dividends at existing levels for now,” Collins Stewart analyst Gordon Gray wrote in a note today. “However, the rising level of public anger in the U.S., including pressure for BP to establish an escrow account for spill compensation, now point to the likelihood that BP will not pay a cash dividend for the second quarter.” To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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BP’s Credit Rating Is Lowered Six Levels by Fitch to Two Grades Above Junk

June 15, 2010

By Brian Swint and John Glover June 15 (Bloomberg) — BP Plc’s credit rating was cut six levels to two above junk by Fitch Ratings on concern over the potential cost of cleaning up the Gulf of Mexico oil spill and meeting future liabilities. BP’s long-term issuer default and senior unsecured ratings were lowered to BBB from AA, Fitch said in a statement today. That follows a reduction from AA+ on June 3. President Barack Obama and U.S. lawmakers said this week that BP should suspend dividends and set aside funds now for legal claims against the company from the spill, the worst in U.S. history. Fitch said it would be “surprised” if BP didn’t suspend the quarterly payout until the full costs are known. The cost of cleanup and liabilities may reach $40 billion, Standard Chartered Plc. estimated last week. “The recent claims by U.S. state and federal authorities that BP escrow significant sums preemptively, ahead of any agreed claims process, represent a material change in approach,” Fitch said in a statement. BP has about $23 billion of debt outstanding, Bloomberg data show. BP fell 3.8 percent to 342 pence in London, the lowest since April 1997, after earlier rising as much as 2 percent. Borrowing Costs BP’s cost of borrowing is greater now for the short term than for longer periods, a signal lenders are concerned at the possibility of incurring losses on their credits. Investors demand more yield to compensate them for an expected loss in the short term because a decline in the value of a long-term investment can be spread out over a greater period. The result is that the so-called yield curve inverts as yields on short-term bonds rise. The yield premium investors demand to hold BP’s $1.5 billion of 3.125 percent bonds due 2012 rather than similar- maturity government debt jumped 114 basis points to 730 basis points, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The spread on its $1 billion of 4.75 percent notes due 2019 increased 48 basis points to 378 basis points, according to Trace. BP five-year credit-default swaps surged 39 basis points to 476.5 after today’s ratings downgrade, according to CMA DataVision. Contracts covering the company’s debt for one year were at 579 basis points, according to CMA. Senate Majority Leader Harry Reid yesterday requested that BP set aside $20 billion in a fund to be administered by an independent trustee to speed up the claims process for victims of the spill. Changed Outlook Fitch changed the outlook on BP to “evolving” from “negative.” BP had $5 billion of cash available, $5.25 billion of bank credit lines it hadn’t used and another $5.25 billion of stand- by bank facilities, according to Fitch, which cited a June 4 investor call. Fitch said it expects BP’s lenders to allow the company to use the credit lines if needed. Moody’s Investors Service rates BP debt at Aa2, the third- highest investment grade, and Standard & Poor’s has it at AA-, seven grades above the highest non-investment ranking. S&P downgraded BP by one level last week. Moody’s and S&P, both based in New York, declined to comment. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net . John Glover in London at johnglover@bloomberg.net

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BP Drops to Lowest Level in 13 Years as U.S. Anger Swells Over Gulf Spill

June 10, 2010

By Brian Swint June 10 (Bloomberg) — BP Plc plunged to the lowest price in 13 years in London trading on growing U.S. anger over its failure to halt the Gulf of Mexico oil spill. BP fell as much as 12 percent to 345.15 pence, the lowest since April 1997, before paring losses to trade at 369.55 pence at 9:40 a.m. local time. That’s 44 percent lower than on April 20, the day of the Deepwater Horizon rig explosion that killed 11 workers and triggered the worst oil leak in U.S. history. President Barack Obama and U.S. lawmakers are stepping up their rhetoric against BP as it battles to stop the spill. Representatives led by Peter Welch yesterday called on BP to suspend dividend payments, and Obama has said he would fire Chief Executive Officer Tony Hayward if he were working for him. BP said today it “faces this situation as a strong company.” “The share price is political and in no way fundamental,” said Jason Kenney , an analyst at ING Wholesale Banking in Edinburgh. “The U.S. needs to realize it needs BP to survive to clean up the mess. Scapegoating has gone too far.” BP’s market capitalization is now lower than Total SA, the company’s Paris-based rival, after losing more than 50 billion pounds ($73 billion) since the accident. BP’s American depository receipts closed at the equivalent of 334 pence in the U.S. yesterday. “BP notes the fall in its share price in U.S. trading last night,” the company said in today’s statement. “The company is not aware of any reason which justifies this share price movement.” Bonds, Swaps BP bonds and credit-default swaps are trading as if the energy company has lost its investment-grade rating as costs mount from the spill. The cost to protect $10 million of BP debt for a year with credit-default swaps almost doubled to $512,000, according to CMA DataVision. It was $29,000 on April 30. “These are undeniably difficult times for all of us who work for BP,” Hayward wrote in a memo to BP employees this morning. “We are in this for the long run — we will do the right thing in our response, and we will emerge as a stronger and safer company when we come through the other side.” Standard Chartered Bank said BP’s liability for the spill could be as high as $40 billion. Higher than expected cash flows, low levels of borrowing and the company’s assets give it “significant capacity and flexibility in dealing with the cost of responding to the incident, the environmental remediation and the payment of legitimate claims,” BP said today. The market is discounting more than $106 billion of value in the company in today’s share price, ING’s Kenney said. That makes the selloff look like an “all out panic.” In a separate statement, BP said the containment cap on the leaking oil well collected 7,920 barrels of crude between midnight and noon yesterday. The response to the spill has cost the company $1.43 billion so far, according to the statement. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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BP Show of Support May Fail to Save Chief Hayward as Obama Goes on Attack

June 9, 2010

By Stanley Reed and Brian Swint June 10 (Bloomberg) — On the night of June 7, a group including Vittorio Colao , head of telecom company Vodafone Plc, Martin Sorrell , chief of advertising firm WPP Plc, and John Sawers , director-general of the intelligence agency MI6, gathered on the sixth floor of BP Plc’s London headquarters to show support for Tony Hayward , the company’s beleaguered chief executive officer. “We have learned that he is made of steel,” BP Chairman Carl-Henric Svanberg said as Hayward, dressed in a rumpled blue suit and dark checked shirt, worked the room. The 53-year-old CEO will testify before Congress next week. The show of support may not save Hayward, Bloomberg Businessweek reports in its June 11 issue. The day after the London party, President Barack Obama said he would have fired the BP chief if he were working for him. Demands for a change in leadership will probably become irresistible, said Gudmund Halle Isfeldt , an analyst at DnB NOR ASA, Norway’s largest bank. “Both Hayward and the chairman are likely to go,” he said in a phone interview from Oslo. “That will be down to pressure from politicians.” Lose Patience Investors may start to lose patience as well. BP shares have tumbled again this week, taking losses since the Deepwater Horizon rig exploded on April 20 to 40 percent, a drop that’s wiped about 50 billion pounds ($74 billion) off the value of the company. The cost of cleaning up the spill and settling claims may reach as much as $37 billion, according to Credit Suisse. Should the board seek a change, there are three leading inside candidates to succeed Hayward, analysts said. Andy Inglis , 50, the head of exploration and production, had been considered as Hayward’s likely successor. His chances suffered after the calamity occurred in his unit. Refining and marketing chief Iain Conn , 47, has made a start at turning around BP’s downstream business, where the 2005 explosion at the Texas City refinery forced improvements to safety. Another candidate is Robert Dudley , 54, who ran BP’s Russian affiliate TNK-BP until he left in 2008 during a battle with the company’s Russian partners. On June 5, Hayward put Dudley in charge of a special unit responsible for the cleanup operation. Dudley, born in New York and raised in Mississippi, would be the first American CEO at the 101-year old British company. ‘Great Job’ “If he does a great job at running the unit, there’s no reason he can’t go to the top” said Dougie Youngson , an analyst at Arbuthnot Securities Ltd. in London. To show the company is serious about changing the way it operates, BP’s board may decide to bring an outsider in as chief executive officer for the first time ever. One possibility is Frank Chapman , 56, head of BG Group Plc , who built the former state-owned gas driller in to the biggest British-based oil and gas company after BP. He hugged Hayward sympathetically at the party this week. “BP is clearly going to require a renewed focus on safety,” said David Hart , an analyst at Westhouse Securities Ltd. in London. “In deepwater drilling, companies are pushing the bounds of technology and, perhaps industry-wide, there was not a great understanding of what would happen if things went wrong.” To contact the reporter on this story: Stanley Reed in London at sreed13@bloomberg.net ; To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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Hayward Pledges to Steer BP Through Gulf Spill Crisis, Has Board’s Backing

June 4, 2010

By Brian Swint and Eduard Gismatullin June 4 (Bloomberg) — BP Plc Chief Executive Officer Tony Hayward , under growing pressure over the oil spill in the Gulf of Mexico, pledged to lead the company through the crisis with the backing of the board. “My number one priority is to steer BP through this crisis, and that is exactly what I intend to do,” Hayward said on a conference call with investors today. He has received “extraordinary support” from the board, he said. Criticism of Hayward grew this week after BP’s failure to stem the flow from the damaged well caused the biggest share price drop in 18 years and led to speculation over his future. Fitch Ratings and Moody’s Investor Service downgraded BP’s credit rating yesterday on concern about the rising costs of the worst spill in U.S. history. “This was a rational, level-headed, confident delivery,” said Jason Kenney , an analyst at ING Wholesale Banking in Edinburgh. “There’s still a lot of speculation and unknowns, but ultimately BP is committed to rectifying the issue and regaining its reputation in the long run.” About 40 billion pounds ($59 billion) has been wiped off the value of BP since the April 20 explosion that killed 11 workers on the Deepwater Horizon rig. Credit Suisse said the disaster may cost BP as much as $37 billion, almost double this year’s likely profit, risking a cut in dividends. Severe “The financial consequences of this will undoubtedly be severe,” Hayward said “We’re a strong company committed to meeting all of our responsibilities.” Chairman Carl-Henric Svanberg said the company won’t make a decision on the dividend until late July. BP “fully understands” the importance of the dividend to investors, he said earlier in a statement. Expenses so far won’t hurt investment, and other projects are generating more cash flow than the company had expected, Hayward said. “We are not changing significantly the capital program because quite simply we are generating far and above the cash we need to satisfy all of the things we can see,” Hayward said. He wants to balance “having a very strong balance sheet with lots of flexibility on it, having an investment program for the future, sustaining the dividend and importantly dealing with the costs and restitution of the Gulf coast.” Hayward said he will keep gearing, or the ratio of borrowing to equity, at the lower end of the 20 percent to 30 percent target range. The ratio was 19 percent in the first quarter. Flexibility BP’s cashflow, borrowing levels and assets “give us flexibility in dealing with the costs of the incident,” Hayward said. It isn’t possible to estimate what the final cost will be, he said. BP paid a dividend of 56 cents a share last year. If it maintains it, the ratio of dividend to the current share price would be 9.4 percent, more than any of the company’s 18 global peers, according to Bloomberg data. BP sheared away the riser from its leaking Gulf of Mexico well. It may be able to capture more than 90 percent of the oil leaking from the well with the cap it put in place last night. An attempt to plug the well with mud and debris failed last weekend. That means that the flow of oil from the well probably won’t be stopped until August, when the drilling of relief wells is scheduled for completion. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net . Eduard Gismatullin in London at egismatullin@bloomberg.net

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BP Declines Most in 18 Years After Abandoning Attempt to Plug Leaking Well

June 1, 2010

By Brian Swint and John Glover June 1 (Bloomberg) — BP Plc fell the most in 18 years in London trading after abandoning an attempt to plug a leaking oil well in the Gulf of Mexico, the worst spill in U.S. history. BP plunged as much as 17 percent to 411.5 pence, the steepest one-day drop since June 1992, and its bonds traded in line with companies rated as much as levels lower. BP said on May 29 the attempt to plug the leak using heavy fluids and debris had failed. That rules out stopping the flow of oil from the well until relief drilling is completed in August. “Until the flow of oil from this well can be halted, there will remain considerable uncertainty over the potential damages,” said Peter Hitchens , an analyst at Panmure Gordon & Co. in London. “Although we believe that the market has overreacted to the bad news, we feel that there will be little stimulus to the shares whilst this leak continues to pump oil into the sea.” The company will now try to contain the spill by fitting a pipe over the leak later this week to bring the oil to a drillship on the surface, it said in a statement in London today. The operation may temporarily increase the flow of oil into the Gulf before a cap can seal the pipe. The cost of responding to the spill has risen close to $1 billion, BP said. Investors demand a yield premium of 148 basis points on average to buy BP’s bonds rather than government debt, Bank of America Merrill Lynch’s energy industry index shows. That’s almost double the 77-basis point spread on notes sold by industrial companies with similar credit ratings. The shares traded at 419 pence at 12:04 p.m. London time. Chief Executive Officer Tony Hayward ’s effort to stop the leak and clean up the spill is becoming more urgent as hurricane season starts. Winds from the southwest could spread the spill this week to threaten the coasts of Mississippi and Alabama, the National Oceanic and Atmospheric Administration said. BP said today it has so far spent $990 million responding to the explosion on the Deepwater Horizon rig on April 20 that killed 11 workers, as well as the cleanup from the oil spill. Survival at Stake The company’s survival is at stake, London-based investment bank Arbuthnot Securities Ltd. said today. The cost of the disaster and the share-price drop may make BP a takeover target or force the company to split up, analyst Dougie Youngson said in a note. Credit-default swap contracts on BP rose to a record 136 basis points from 100.6 basis points on May 28, according to CMA DataVision prices in London. A basis point on a contract protecting 10 million euros ($12.2 million) of debt from default for five years is equivalent to 1,000 euros a year. Using robots at the mile-deep well, BP plans to shear away most of the damaged pipe that once rose from the well to the Deepwater Horizon. It will then make a more precise cut with a diamond-toothed band saw to make a clean junction for a gasket-lined cap, which is intended to catch most of the oil and route it to the surface through a pipe, BP Managing Director Robert Dudley said in television interviews last weekend. Engineers expect the method to work better than a smaller pipe used to capture 22,000 barrels of oil, he said. The well has spewed from 12,000 barrels to 19,000 barrels of oil a day, a government panel estimated May 27. Government experts estimate the spill will increase over the four to seven days BP needs to fix the cap, White House Energy Adviser Carol Browner said on May 30. Winning the Lottery BP reiterated that the first relief well, which it began drilling May 2, is now at 12,090 feet, two-thirds of the way to completion. The drilling effort is “on track, even slightly ahead,” said BP’s Pack. The chances of intercepting the damaged well with a relief well on the first try are equivalent to winning the lottery, according to David Rensink, the president-elect of the American Association of Petroleum Geologists. Initial failure is “almost a certainty,” he said. President Barack Obama ordered BP’s cleanup efforts tripled in oiled areas that encompass 107 miles (172 kilometers) of shoreline and 30 acres of tidal marsh. “Every day that this leak continues is an assault on the people of the Gulf Coast region, their livelihoods, and the natural bounty that belongs to all of us,” Obama said in a statement May 29. “It is as enraging as it is heartbreaking.” To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net ; John Glover in London at johnglover@bloomberg.net .

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BP Reports Higher First-Quarter Profit of $6.08 Billion as Crude Rebounds

April 26, 2010

By Brian Swint April 27 (Bloomberg) — BP Plc , the energy company battling a 1,000-barrel-a-day leak in the Gulf of Mexico, said profit more than doubled in the first quarter on higher oil prices. Net income rose to $6.08 billion from $2.56 billion a year earlier, London-based BP said today in a statement distributed by the Regulatory News Service. Excluding gains or losses from holding inventories and one-time items, earnings beat analyst estimates. “Higher profits are mostly down to oil prices,” Alastair Syme , an analyst at Nomura Holdings Inc., said before the report. “Refining has picked up since the fourth quarter. We see a continuation of BP’s strong profitability trend.” The price of crude was almost twice as high in the first three months of the year than in the same period in 2009, and margins for turning crude into fuel improved from the fourth quarter. The results may be overshadowed by the spill, which followed an explosion on a BP-leased rig from which 11 workers are still missing. BP is the first of the world’s biggest oil companies to report earnings. It will be followed by Royal Dutch Shell Plc tomorrow and Exxon Mobil Corp. on April 29. Excluding one-time items and inventory changes, BP earned $5.65 billion. That beat the $4.84 billion median estimate of analysts surveyed by Bloomberg. Chief Executive Officer Tony Hayward flew to Louisiana and Texas to oversee the rescue and cleanup operation for BP. An underwater well leak is streaming oil 48 miles across the Gulf of Mexico after the Transocean Ltd. rig Deepwater Horizon caught fire and sank last week. Deadliest Explosion If the missing workers died, it would be the deadliest U.S. offshore rig explosion since 1968, when 11 died and 20 were injured at a platform owned by Gulf Oil Corp., according to data from the Minerals Management Service. Fifteen workers were killed and more than 100 injured in an explosion at BP’s Texas City, Texas refinery in 2005. BP, the biggest oil and gas producer in the Gulf of Mexico, is unlikely to see production suffer as result of the accident because the deposit it was drilling was relatively small. Hayward aims to increase output by as much as 2 percent a year through 2015 and in March BP agreed to buy $7 billion of assets from Devon Energy Corp. in the Gulf, Brazil and Azerbaijan. Crude prices averaged $78.88 a barrel in New York in the first quarter, about 82 percent higher than an average of $43.32 a barrel last year. Refining profit margins have also picked up after slipping to a 15-year low in the fourth quarter. BP’s Global Indicator Margin, a broad measure of the profitability of turning crude in to fuels, averaged $3.08 a barrel in the first quarter after $1.49 in the fourth quarter. Chief Financial Officer Byron Grote will host a webcast on BP’s first quarter results at 2 p.m. in London. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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BP to Pay $7 Billion for Devon’s Assets in Gulf of Mexico, Brazil, Caspian

March 11, 2010

By Brian Swint March 11 (Bloomberg) — BP Plc , Europe’s largest oil and gas company, will pay Devon Energy Corp. $7 billion in cash for assets in Brazil, the Gulf of Mexico and Azerbaijan. As part of the deal, Devon will buy a 50 percent interest in BP’s Kirby oil sands project in Canada, BP said in a press release in London today. The companies will form a 50-50 joint venture there, with Devon paying $500 million for its stake and committing to pay $150 million of BP’s capital costs. “This strategic opportunity fits well with BP’s operating strengths and key interests around the world,” said BP Chief Executive Officer Tony Hayward . “As well as giving us a broad portfolio of assets in the exciting Brazilian deepwater, it will strengthen our position in the Gulf of Mexico, enhance our interests in Azerbaijan and enable us to progress the development of Canadian assets.” Hayward said last week that BP was interested in gaining access to assets off the coast of Brazil as he tries to secure additional reserves. BP outpaced Exxon Mobil Corp. in oil production for the first time last year. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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BP’s Hayward Gets 41% Pay Raise as Explorer Beats Exxon in Oil, Gas Output

March 5, 2010

By Brian Swint and Eduard Gismatullin March 5 (Bloomberg) — BP Plc Chief Executive Officer Tony Hayward received a 41 percent pay increase last year, after the company produced more oil and gas than Exxon Mobil Corp. for the first time. Hayward was paid 4.01 million pounds ($6 million) in cash and shares compared with 2.85 million pounds in 2008, the London-based company said in its annual report published today. The figures don’t include his pension fund, which is worth about 2.7 million pounds. The CEO has promised to increase production further over the next five years after outpacing Exxon in 2009 with 4 million barrels a day of oil equivalent in output. BP aims to increase profitability by an annual $3 billion over the next three years after exceeding 2009 cost-cutting targets. “In a volatile year for the world economy, the BP executive team produced excellent results,” DeAnne Julius , chairman of BP’s remuneration committee, said in a statement. “While salaries were frozen for all directors in 2009, the variable performance-related pay reflected the impressive achievements of the year.” Royal Dutch Shell Plc , which was overtaken by BP in terms of market value in January, last month announced plans to freeze the salaries of Chief Executive Officer Peter Voser and others. That was in response to a shareholder backlash last year, when bonuses were paid even as executives missed performance targets. Lower Earnings BP posted a 22 percent drop in annual profit last year as the recession dragged down demand for oil products and average selling prices fell. The producer still ranked first in four of six comparisons with its peers used by BP’s pay committee to determine compensation, including production growth, earnings per share, return on capital employed and free cash flow, Julius said. The committee said that base salaries were frozen in July 2008 and suggested that part of executives’ bonuses must be deferred in the future, subject to the company’s environmental and safety record. Shareholders will vote on a plan to defer a third of directors’ bonuses, to be paid in shares with an option to defer another third, for three years, at the annual general meeting on April 15. Safety “This change would place more focus on the long term, highlight the importance of safety and build a larger equity stake for executives that we believe aligns their interests well with shareholders,” Julius said. Andy Inglis , head of exploration and production at BP, saw his overall compensation rise to 2.7 million pounds from 2.3 million pounds, and Iain Conn , in charge of marketing and refining, received 2.4 million pounds compared with 1.9 million pounds. Chief Financial Officer Byron Grote , who is paid in dollars, received $4.4 million, up from $3.7 million in 2008. Carl-Henric Svanberg , who became chairman of BP on Jan. 1, will receive a salary of 750,000 pounds, the report said. That compares with his predecessor Peter Sutherland ’s salary of 600,000 pounds. BP has gained 16 percent in London trading since the beginning of last year. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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BP’s Hayward Chases Exxon With Refining Cost Cuts, Natural Gas Production

March 2, 2010

By Brian Swint March 3 (Bloomberg) — BP Plc Chief Executive Officer Tony Hayward outlined plans to boost production and cut refinery costs as he tries to close the gap with Exxon Mobil Corp., the world’s most profitable oil and gas company. BP said yesterday it can increase production as much as 2 percent a year through 2015 as the share of natural gas in total output rises to 45 percent from 40 percent. It aims to improve underlying profitability in its refining business by $2 billion over two to three years, Hayward told investors and analysts during the company’s annual strategy briefing. “It’s not going to be easy, but their plan is credible,” said Jason Kenney , head of oil and gas research at ING Commercial Banking in Edinburgh. “They’ll be at least as good as Exxon in terms of return on capital employed over the next five or six years. That’s a major turnaround from the dark days of 2005 and 2006. They’re firing on all cylinders, but they’ve not yet pressed the accelerator.” BP’s oil and gas production passed Exxon’s for the first time last year even as the U.S. producer earned more than $4 billion above its London-based rival. Hayward said his company has larger, more complex refineries than its peers, allowing it to wring extra cash from its plants as fuel-processing profits for the industry remain depressed. BP’s market capitalization was about half of Exxon yesterday even after BP’s 22 percent gain since the middle of last year, compared with a 7 percent drop for Exxon. BP trades at a price-earnings ratio of about 10, while Exxon’s multiple is more than 16. ‘Unrelenting Pursuit’ “Our direction is clear, it is the unrelenting pursuit of competitive leadership in relation to cash costs, capital efficiency and margin quality,” Hayward said during the presentation in London. “We believe we’ve made a good start, but it’s only a start.” BP’s underlying net income, a measure that excludes one- time items, was $14.6 billion last year, BP said. That compares with an annual profit at Exxon of $19.3 billion. ING’s Kenny said BP may overtake Exxon in return on capital in about 2013. In exploration and production, project management will be centralized in Houston in the biggest shakeup since the merger with Amoco Corp. in 1998, said Andy Inglis , who heads BP’s upstream business. The company can save as much as $700 million a year in project management and $500 million a year by improving the efficiency of drilling operations, he said. BP’s average daily oil and gas production rose to 3.998 barrels last year. Exxon’s average production fell to 3.933 million barrels a day from 4.237 million barrels a day in 2006. Double Target Last year, Hayward cut the company’s cost by about $4 billion, double BP’s target at the start of 2009. Iain Conn , head of refining and marketing at BP, said that the company has closed the performance gap against rivals since 2007. The company will press ahead with a modernization program at its refineries, with the upgrade at its Whiting refinery in Indiana being the largest undertaking, Conn said. BP expects refining costs to return to 2004 levels. “Exxon is the natural target now because Shell has slipped behind,” said Peter Hitchens , an analyst at Panmure Gordon & Co. in London. “Exxon has a fabulous refining business, and given its scale, there’s no way BP can catch them up in gross profits. But they can catch them with return on capital, and they already have with production.” BP has sold refineries, giving it less exposure to the sector than European rivals Royal Dutch Shell Plc and Total SA. BP’s refining capacity is about equal to its crude oil production, while the other two companies are able to process twice their daily oil output. The company’s projected production increases don’t include Iraq, where BP has agreed to help raise production at the Rumaila field in partnership with China National Petroleum Corp. It could become the second-largest producing field in the world by 2015, Inglis said yesterday. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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BP to Raise Annual Profit $3 Billion by Boosting Production, Cutting Costs

March 2, 2010

By Brian Swint March 2 (Bloomberg) — BP Plc , vying with Royal Dutch Shell Plc as Europe’s largest oil company, plans to increase annual pre-tax profitability by $3 billion over the next two to three years by bolstering production and cutting costs. BP will increase average annual oil and gas output by 1 to 2 percent through 2015, the company said in a annual strategy update today in London. Most of the increased profitability will come from making the refining and marketing business more efficient. The company will centralize exploration and production project management to save money, it said. “The challenge and the opportunity for us is that while our portfolio ranks amongst the best in the industry, our financial performance has yet to fully reflect this,” Chief Executive Officer Tony Hayward said in a statement. “There is now a real opportunity to make our portfolio work harder for us, and we intend to do just that.” BP missed analysts’ earnings estimates in the fourth- quarter as weaker refining margins weighed on profits. BP said it can save an additional $2 billion in its refining and marketing business in the next few years after exceeding cost- cutting targets in 2009. Oil production in 2010 will be “slightly lower” than last year’s output of 4 million barrels a day, Hayward said Feb. 2. BP’s output portfolio is shifting toward natural gas. The company will start 42 new major projects by 2015, which are expected to contribute about 1 million barrels of oil equivalent a day to total production, the company said today. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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BP Predicts Slow, Gradual Recovery After Profit Misses Analysts’ Estimates

February 2, 2010

By Brian Swint and Eduard Gismatullin Feb. 2 (Bloomberg) — BP Plc , which has overtaken Royal Dutch Shell Plc as Europe’s largest oil company, posted a profit in the fourth quarter after a year-earlier loss, bolstered by higher crude prices and output gains. Net income of $4.3 billion compared with a loss of $3.3 billion a year ago, London-based BP said today in a statement distributed by the Regulatory News Service. Excluding one-time items and inventory changes, earnings missed analyst estimates. Under Chief Executive Officer Tony Hayward , BP took over the number one spot from Shell in terms of market value after ramping up operations in the Gulf of Mexico and beating a cost- cutting target. Crude futures in New York were on average 29 percent higher than in the fourth quarter of 2008, boosting profits even as refining margins remained under pressure. “BP is the exception in having higher profitability,” Lucy Haskins , an oil analyst at Barclays Capital in London, said before the results were released. “The challenge is maintaining top-line momentum and securing more resource opportunities.” BP, the first of Europe’s oil majors to report earnings, will be followed by The Hague-based Shell in two days. Exxon Mobil Corp. , the largest U.S. company, posted a fifth straight drop in quarterly profit yesterday to $6.05 billion. Chevron Corp. , the second-largest U.S. energy company, reported a 37 percent drop in earnings to $3.07 billion. Excluding one-time items and gains or losses from inventories, BP’s profit was $4.38 billion. That missed the $4.7 billion median estimate of 13 analysts surveyed by Bloomberg News. Production rose 4 percent to 3.998 million barrels of oil equivalent a day in 2009. Share Performance BP has risen 23 percent over the past 12 months, compared with a 1.5 percent gain for Shell. The Dow Jones Europe Oil & Gas Index is up 21 percent. BP’s Global Indicator Margin, a broad measure of refining profitability, dropped to $1.49 per barrel in the fourth quarter, the lowest level since the first quarter of 1995, according to BP data. That compared with $5.19 in the last three months of 2008. The outlook for refining is “very tough,” Hayward said last week. BP, already the largest producer in the region, is aiming for a 50 percent increase in production from the Gulf of Mexico after announcing a “giant” oil discovery at the Tiber prospect in September. The company expected cash costs to have been about $4 billion lower in 2009, compared with an initial forecast of $2 billion. Hayward said BP can lower operating costs further this year in an interview last week in Davos, Switzerland. BP is interested in acquiring assets in Brazil and is working with China Petrochemical Corp. to expand in Asia, Hayward said. The company may invest about $15 billion with partners in Iraq as it seeks to boost crude output at the Rumaila deposit. BP and China National Petroleum Corp. won a service contract in June to develop Rumaila. The U.K. producer agreed on “perfectly acceptable commercial returns” for the project, Hayward said Oct 20. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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U.K. Economy Probably Shrank 0.3% in Third Quarter After Revised Estimate

November 25, 2009

By Brian Swint Nov. 25 (Bloomberg) — The U.K. economy shrank less than previously estimated in the third quarter as the longest recession on record eased, a survey of economists shows. Gross domestic product probably fell 0.3 percent from the second quarter, less than the 0.4 percent drop reported on Oct. 23, according to the median of 28 economists’ forecasts in a Bloomberg News survey. The Office for National Statistics will release its second estimate at 9:30 a.m. today in London. “The shrinkage looks a bit overdone,” said Alan Clarke , an economist at BNP Paribas SA in London. “Other surveys are showing output isn’t nearly as downbeat. I wouldn’t be surprised to see it eventually put close to zero.” The Bank of England this month expanded its bond purchase plan by 25 billion pounds ($41 billion) after the economy’s third-quarter contraction took policy makers and economists by surprise. Governor Mervyn King said yesterday the bank has been encouraged by signs of a recovery even if it isn’t “particularly strong.” A revision higher may help Prime Minister Gordon Brown as he tries to erode Conservative Leader David Cameron’s lead in opinion polls in time for the election, due by June. An Ipsos Mori poll in the Observer on Nov. 22 showed the Conservatives with a six-point lead, the least since December. Recovery Lags The U.K.’s recovery has lagged behind that of the U.S. and the euro area, which have both returned to growth. Data yesterday showed Germany’s economic growth accelerated in the third quarter, while the U.S. economy expanded at a 2.8 percent annual rate, less than the government reported last month. The Bank of England forecasts Britain will exit recession in the fourth quarter. The economy will expand 2.2 percent in 2010 and 4.1 percent in 2011, according to policy makers’ projections published on Nov. 11. Unemployment rose at the slowest pace in 18 months in October, retail sales rose for a second month and the inflation rate increased more than expected, to 1.5 percent. The bank aims to keep inflation at 2 percent. Policy makers may pause asset purchases after the 200 billion pounds they have pledged to spend by February, Monetary Policy Committee member Adam Posen indicated yesterday. “One hopes that we are coming to the end of the large-scale quantitative easing exercise,” he told lawmakers. GDP ‘Surprise’ Policy maker Andrew Sentance said in a speech on Nov. 16 that the “surprise” gross domestic product estimate may be revised later, and that such data can be “particularly unreliable” at an economic turning point. “It will take some time before there is a widespread perception that we’re out of recession,” Sentance said in an interview with Bloomberg Television. “But the broad balance of evidence is that the U.K. economy has started to grow in the second half of this year.” By contrast, David Blanchflower , who left the rate-setting panel in June, said on Oct. 26 that “there’s every prospect” that the third quarter GDP figure could be revised down. Banks are still working to shore up their finances after government-led bailouts of Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc during the 2008 financial crisis. Lloyds said yesterday it plans to raise a record 13.4 billion pounds in the country’s biggest rights offering. None of the economists surveyed predicted a downward revision in today’s data. Six of them forecast the estimate will remain unchanged, 19 said it will change to a 0.3 percent drop and three said that it will be 0.2 percent. The report today will show any revisions to output indicators on services, manufacturing and construction, and a breakdown of spending during the third quarter. The statistics office will release a further GDP estimate on Dec. 22. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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Brown to Allow U.K. Regulators to `Tear Up’ Some Bankers’ Bonus Agreements

November 15, 2009

By Brian Swint Nov. 15 (Bloomberg) — U.K. Prime Minister Gordon Brown’s government will next week announce plans to make some bankers’ bonuses illegal as it tries to clamp down on the excessive risk- taking that helped stoke the financial crisis. Regulators will be given “powers if necessary to tear up contracts that would result in payments being made that would cause instability,” Chancellor of the Exchequer Alistair Darling told the Sunday Telegraph. Speaking on Sky News, City Minister Paul Myners said “if those contracts are written, they will be voided under law.” Brown, who has trailed in polls for almost two years and must call an election by June, will set out his goals for the next session of parliament with the Queen’s Speech on Nov. 18. The proposals will also reverse a plan to cut a tax break on childcare, allow consumers to make class-action lawsuits against lenders and require banks to have a plan for winding down operations if they run into trouble, The Sunday Times said. Brown’s Labour Party will have about five months to pass the legislation before the election interrupts Parliament. The Queen’s Speech will last about 20 minutes, half the length of last year’s address, the News of the World reported today. Myners said that he is “sure” the financial services bill will be passed. “We’re not seeking to cap absolute levels of bonuses,” Myners said. “We want to make sure that bonus arrangements no longer contribute to excessive risk-taking” and that “we have a framework in which the taxpayer will never again have to step in and provide capital to support the banking industry.” Bankers’ Warning The British Bankers’ Association warned Brown that new proposals shouldn’t discourage banks from coming to Britain to expand or set up business. “We clearly need to see the detail of these proposals but we would be wary of any actions which set the U.K. at a disadvantage, discourage international businesses from coming here and make it more difficult to attract, reward and retain high quality staff,” according to an e-mailed statement. The opposition Conservatives increased their lead to 14 percentage points from 11 points a month ago, according to a YouGov Plc poll published in the Times today. The Labour Party had the support of 27 percent of Britons, the Conservatives had 41 percent and 18 percent of voters backed the Liberal Democrats. Speaking in a podcast recording yesterday, Brown said he’s trying to prevent taxpayers having to foot the bill for any future banking bailout. “This means a transformation of the way the financial sector is policed, with banks themselves and not the taxpayer made to pay for bank failings,” he said. Another poll in the Independent on Sunday showed that 71 percent of Britons support an end of combat operations in Afghanistan within the next year. As of Nov. 8, 232 British troops had died in Afghanistan since 2001. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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Hated Investment Bank `Oligarchs’ Scupper Moves to Split Lenders, Kay Says

November 13, 2009

By Brian Swint Nov. 13 (Bloomberg) — Investment bankers are wielding their political influence to override popular support for legislation to break up lenders’ trading and retail operations, economist John Kay said. “You have a group of politically powerful oligarchs, whom other people hate, but who are entrenched there,” Kay, a visiting professor at the London School of Economics, said in an interview yesterday. “It will require something of a political earthquake” to reduce the bankers’ sway, he said. Bank of England Governor Mervyn King said in September that a debate on the structure of banking is needed and described an article by Kay as “the most important piece written on the subject in 10 years.” King also cited Kay as he argued in a speech last month for splitting retail operations from investment banking. “I’m struck actually when I talk to an audience like this, or indeed to people in the City who are not investment bankers, how much support for breaking up the banks there is,” said Kay, who was speaking after a debate in London. Prime Minister Gordon Brown said on Oct. 21, the day after King’s speech, that “the difference between having a retail and investment bank is not the cause of the problem, the cause of the problem is that banking has not been sufficiently regulated.” Brown faces an election by June. “There’s something unreal about where we are at the moment,” Kay said. “It’s in some ways the product of this dying government. It’s a strange era.” Conservative Policy The opposition Conservatives are “genuinely interested” in separating bank operations, though “it’s harder for Conservatives to do and the truth is, they’re pretty dependent on the financial services sector as well,” he said. Kay, who co-authored a book on taxation with King two decades ago, said that banking regulation should aim not to prevent insolvencies, but to curb their effects. “It’s the same as when any other company goes bust — it will spread to other companies, but you have to limit it,” Kay said. He cited the example of Lehman Brothers Holdings Inc. ’s collapse in September last year, which exacerbated the global financial crisis. “The idea is to create sufficient breaks between Lehman and the financial services system,” he said. “We absolutely need to ensure that you can let Lehman go down without too much problem.” The solution is to structure the financial system in two parts, Kay said. ‘Pure Utility’ “One, which one might describe as a pure utility, is the payments system and the deposit element of it,” he said. “That is what you have to ring-fence.” Kay said that oversight of such banking operations should be akin to regulation of utilities, citing examples of U.K. transport insolvencies. “When Railtrack when bust, the trains kept running,” he said. “Then there’s the competitive product bit, savings products and such,” he said. As with food or fuel, “the government stands in the background and will intervene on major interruptions of supply, but you don’t expect that to happen. “Actually, it’s rather easier for government to intervene in that way in the credit markets than it is in the food market because they can print the credit,” Kay said. Such reform is needed to prevent banks from always relying on state support, which encourages risky behavior. The result of the financial crisis at this point is that bankers “have learned the taxpayer will be there on a scale you could never have believed,” he said. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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King Gives BOE Leeway as Bernanke, Trichet Signal Move to Exit Stimulus

November 11, 2009

By Brian Swint and Jennifer Ryan Nov. 11 (Bloomberg) — Bank of England Governor Mervyn King is keeping the door open to more emergency policy action just as his counterparts suggest they’re ready to rein it in. King said today he has an “open mind” on further bond purchases as he presented higher forecasts for economic growth and consumer prices. He signaled the central bank may still have room to expand its asset-buying program from the 200 billion pounds ($331 billion) currently planned because inflation will undershoot the 2 percent target in the two-year policy horizon. The Federal Reserve, led by Chairman Ben S. Bernanke , has committed to scale down buying of mortgage-backed debt in the first quarter and European Central Bank President Jean-Claude Trichet signaled last week that some long-term financing auctions will end next month. Australia and Norway have started raising interest rates as the global economic slump ends. “This cautious tone is aiming at keeping the options open for the Bank of England,” said Sarah Hewin , an economist at Standard Chartered Bank in London. “They obviously still do feel that there are risks out there. They don’t want to feel that they can’t, if they need to, go for further asset purchases.” The bank’s decision pushed the pound down against all 16 of its most-traded peers tracked by Bloomberg. The British currency fell as much as 0.9 percent today and traded at $1.6574 as of 4:25 p.m. in London. The yield on the two-year U.K. government bond slipped five basis points to 0.7 percent. Investors have become pessimistic about the pound for the first time since April on the view that the central bank will keept rates on hold until the second half of 2010, according to a survey of 1,558 Bloomberg users published today. The currency will fall over the next six months, the survey showed. King’s Dilemma King is weighing the risk that withdrawing stimulus too soon will push the economy back into recession against the danger that too loose a monetary policy might spark asset-price bubbles. While the forecasts show inflation may exceed the target in 2012, some economists say that’s not something the governor is ready to worry about now. “I don’t think they’re concerned about inflation , whatever their charts say,” said Geoffrey Dicks , chief economist at Novus Capital Markets. “I suspect that in their minds, they’ve finished with quantitative easing, but they’re not going to say that. They’re not going to rule it out.” The central bank, which publishes its forecasts as fan charts, said inflation will stay below its target for most of the next three years before edging above the goal. The rate dropped to 1.1 percent in September, the lowest in five years, as the recession purged cost pressures in the economy. Bond Program The Bank of England last week extended the bond-purchase program by 25 billion pounds, the smallest of three expansions since the plan started in March. “We have a completely open mind as to whether to do more asset purchases or not,” King told reporters at a press conference in London. He said that he’s not yet concerned about a renewed bout of asset bubbles. King, viewed as one of the toughest inflation fighters before the financial crisis, may now be more content to stoke an economic “boom” to claw back the ground lost during the recession, Citigroup Inc. economist Michael Saunders said in a note to investors today. “Policy has been set to produce a boom to close the output gap in the next few years,” Saunders wrote. The bank’s forecasts show that record-low interest rates and bond purchases will stoke a recovery twice as fast as those from the recessions of the early 1980s and 1990s, he said. King’s stance suggests he’s reluctant to follow the Fed and the ECB in signaling that an end to emergency measures is close. ECB, Fed Trichet suggested last week that the ECB’s first exit step will be to let its 12-month auctions of unlimited cash lapse. The Fed completed its $300 billion program of purchasing Treasuries last month and said Nov. 4 that it will purchase about $175 billion of agency debt, less than previously projected, through the first quarter of next year. “The Bank of England doesn’t want to block itself into a corner,” said Standard Chartered’s Hewin. “It’s a difficult period, this turning point for all central banks. Markets are focusing very much on when policy accommodation is going to be withdrawn.” To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net ; Jennifer Ryan in London at jryan13@bloomberg.net .

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King Says BOE Still Has `Open Mind’ on Bond Purchases, Won’t End Stimulus

November 11, 2009

By Brian Swint and Scott Hamilton Nov. 11 (Bloomberg) — Bank of England Governor Mervyn King said the U.K. economy faces a “hard path” back to health and he has an “open mind” on further bond purchases, signaling officials aren’t ready to withdraw stimulus yet. “Even if we get significant positive growth rates in the future, we have a long way to go to get back to where we were,” King told reporters in London today. Deputy Governor Charles Bean said credit is still tight and there are signs some companies are turning away orders because of a lack of capital. The pound fell and bonds rose after King unveiled the central bank’s quarterly forecasts. The Bank of England last week expanded the bond -purchase plan to 200 billion pounds ($335 billion) and the governor said today the U.K. faces a “prolonged period of balance sheet adjustment.” “We have a completely open mind as to whether to do more asset purchases or not,” King said. The pound dropped as much as 0.8 percent to $1.6619. The yield on the two-year U.K. government bond slipped three basis points to 0.7 percent. “It was very important that he did not rule out further asset purchases,” said Colin Ellis, an economist at Daiwa Securities SMBC in London and a former Bank of England official. “That could suggest one or two people wanted to do more last week. The bank’s been surprised on the downside several times on this recession. King’s very conscious he doesn’t want to rule out further action.” Weaker Inflation The bank, which publishes its forecasts as fan charts, said inflation will stay below its 2 percent target for most of the next three years before edging above that level. The inflation rate dropped to 1.1 percent in September, the lowest in five years, as the recession purged cost pressures in the economy. “Downward pressure from the persistent margin of spare capacity” will probably “bear down on inflation for some time to come,” the Bank of England’s quarterly Inflation Report said. The forecasts are based on investor assumptions that the benchmark interest rate , currently at 0.5 percent, will rise to 1.1 percent in the third quarter. “We were surprised about how far sub-target the inflation projection was,” said Richard McGuire , an economist at Royal Bank of Canada in London. “It was best for them to pursue a ‘glass half-empty’ approach on the economy and that’s what they did.” King signaled he’s comfortable with the pound’s 27 percent slide against a basket of currencies from other countries over the past two years. The weaker currency may boost exports and help the economy shift away from domestic spending, he said. Pound Drop “The depreciation of sterling should lead to a recovery in economic activity,” King said. The central bank’s forecasts show it estimates the economy has started expanding again and won’t slip back into a recession. The Bank of England governor stressed the need to curb the budget deficit one day after Fitch Ratings said the U.K.’s sovereign credit rating is most at risk among top-rated nations. Britain last month reported the biggest budget deficit for any September since records began in 1993 as the recession ravaged tax revenue and drove up welfare costs. “The need for a credible plan to ensure a substantial reduction in the fiscal deficit is not clear to everyone,” he said. At the same time, Fitch’s warning shouldn’t be taken at “face value.” King also signaled he’s not yet concerned about a renewed bout of asset bubbles stoked by interest rates at record lows around the world. “We’re not seeing any great expansion of credit,” he said. “Indeed if we could see credit growing more rapidly that would be a very welcome step. ‘‘No central bank in the world is saying that it intends to carry on this policy forever.’’ To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net ; Scott Hamilton in London at shamilton8@bloomberg.net .

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Bank of England Raises Forecasts for U.K. Inflation, May Exceed 2% in 2012

November 11, 2009

By Brian Swint and Scott Hamilton

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Bank of England Should End Bond Purchase Plan at $328 Billion, Julius Says

November 3, 2009

By Brian Swint and David Tweed Nov. 3 (Bloomberg) — The Bank of England should cap its bond purchase plan at 200 billion pounds ($328 billion) this week in a signal that it will stop buying assets in the next quarter, former policy maker DeAnne Julius said. “I would, at this meeting, ask for a small extension, say 25 billion, just to have in our back pocket in case we need to use it,” Julius said in a Bloomberg Television interview in London yesterday. “But I’d be aiming to use it at a diminishing rate and looking at February to pause completely.” While the program has failed to help the economy return to growth, shutting it down right away would shock investors, Julius said. The U.K. central bank will expand the program to 225 billion pounds from the current 175 billion pounds on Nov. 5, according to the median estimate of 48 economists in a Bloomberg News survey . “It’s hard to say quantitative easing is being that effective,” Julius said. “It’s very important that the Bank of England not create its own shocks for this economy. The patient is fragile.” Policy makers, led by Governor Mervyn King , extended the program by 50 billion pounds for a second time in August after starting the program in March with a 75 billion-pound target. The benchmark interest rate has been at a record low 0.5 percent for eight months. Record Recession U.K. gross domestic product fell 0.4 percent in the third quarter, the statistics office reported Oct. 23. That’s the sixth consecutive contraction, the longest streak since records began in 1955. “There is definitely a global recovery under way,” Julius said. “In the U.K., it doesn’t seem to be as prevalent as elsewhere, if we believe the latest evidence on GDP estimates. But we’re certainly seeing it here too.” While the central bank’s bond-purchases have helped bring down yields on government bonds, they haven’t done much to bolster the economy, Julius said. Lower interest rates and the depreciation of the pound will be enough to put the economy back on track, she said. “We’ve got to phase it out very gradually,” Julius said. “We have to be careful about just how we do that because there’s so much uncertainty.” To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net ; David Tweed in London at dtweed@bloomberg.net .

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Bank of England May Choose Risk of More Bond Purchases to Fight Recession

November 2, 2009

By Brian Swint and Svenja O’Donnell Nov. 2 (Bloomberg) — The Bank of England may choose to risk doing too much rather than too little this week as Britain starts to fall behind the rest of the world economy. Governor Mervyn King’s nine-member Monetary Policy Committee will expand its bond-purchase plan by 50 billion pounds ($82 billion) to 225 billion pounds on Nov. 5, according to the median forecast of 48 economists in a Bloomberg News survey. That would be the third increase since the program started in March. Officials are juggling the danger that too much spending will weaken the pound and stoke another housing boom against the risk that too timid an approach will prolong the longest economic slump on record. Officials meet two weeks after a report showed Britain unexpectedly stayed in recession in the third quarter, while counterparts around the world plot exit strategies amid signs of a global recovery. “The danger is you over-stimulate the economy, asset bubbles being the main risk as well as the pound,” said Stewart Robertson , an economist at Aviva Investors in London, which manages about $230 billion in assets. “But if you wait to see the impact, it’s always too late.” The Bank of England will also keep its benchmark rate at a record low of 0.5 percent on Nov. 5, said all 60 economists in a Bloomberg survey. The European Central Bank , which meets the same day, will maintain its main rate at 1 percent, a separate survey showed. The U.S. Federal Reserve will probably keep its benchmark close to zero on Nov. 4. Pound Drop The pound has dropped 6 percent against a basket of currencies of Britain’s major trading partners since August. While some Bank of England officials have signaled that should help exports, gross domestic product still shrank 0.4 percent in the third quarter. The pound traded at $1.6465 n Oct. 30. The bond plan has already split the Bank of England’s board once this year when King’s push for an increase to 200 billion pounds in August was rejected by six votes to three. King’s camp said that the consequences of more stimulus “might be less severe than the possible costs of acting too cautiously.” Chief Economist Spencer Dale argues a smaller increase was warranted because of the risk the program may stoke asset prices too much. Reports since then have given ammunition to both sides. The third-quarter contraction wrong-footed all 33 economists in a Bloomberg survey and industrial production unexpectedly slumped in August to the lowest level since 1992. Royal Dutch Shell Plc , Europe’s largest oil company, said last week that a “quick recovery” in energy demand and prices is unlikely after reporting lower profits. Great Depression On the other hand, the benchmark FTSE-100 index has gained about 10 percent since the Bank of England last increased bond purchases, taking its gain since its March trough to 40 percent. Home values rose annually for the first time in 1 ½ years last month, Nationwide Building Society said Oct. 30. Other central banks are indicating the time has come to withdraw some of the emergency measures introduced to stave off another Great Depression. Norway and Australia have already raised rates and ECB board member Axel Weber said last week the central bank may withdraw unlimited 12-months loans next year. A slower U.K. exit and further bond purchases may hurt the pound, which has dropped 5 percent against the euro since the August decision. “If others have tightening stances and the Bank of England is going full steam ahead with easing that could put further downward pressure on the currency,” said Nick Kounis , chief European economist at Fortis Bank Nederland NV in Amsterdam and a former U.K. Treasury official. Blow Britain’s struggle to escape recession is a blow for Prime Minister Gordon Brown , who must call an election by June and has trailed in opinion polls for almost two years. While he argues the recession reinforces the need for government action, the opposition Conservatives are using recoveries in the U.S. and the euro region as a weapon against him. “Britain now stands out as the only major economy still in recession,” said opposition finance spokesman George Osborne on Oct. 29. Some economists argue that the third-quarter figures were so unexpected that the Bank of England may be reluctant to increase bond purchases on the back of that report. Former policy makers Charles Goodhart and DeAnne Julius said that the contraction in the three months through September shouldn’t overshadow other signs that the economy is improving. “The third-quarter flash estimate puts the Bank of England on the spot in no uncertain fashion,” said Charles Dumas , chairman of Lombard Street Research who predicts that bank won’t expand the program this week. “But they’ll want to do as little as possible, given the extraordinary uncertainties.” To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net . Svenja O’Donnell in London at o sodonnell@bloomberg.net .

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U.K. Economy Will Grow Twice as Much as Forecast in 2010, Item Club to Say

October 17, 2009

By Brian Swint Oct. 18 (Bloomberg) — The U.K. economy will grow twice as fast as previously expected next year as the country pulls out of the worst recession in a generation, Ernst & Young LLP’s Item Club will say tomorrow. Gross domestic product will increase 1 percent in 2010, compared with a 0.5 percent forecast in July, the researchers, who use the same model as the U.K. Treasury, will say in London. The estimate for 2009 will be lowered to a 4.5 percent contraction from a 4.4 percent drop. The Bank of England will assess the progress of its 175 billion-pound ($286 billion) program to buy bonds with newly created money as the interest rate -setting panel produces economic forecasts in November. Britain probably escaped recession in the third quarter after five quarters of contraction, a Bloomberg News survey shows. “The outlook for the next 12 months is certainly looking more positive than the last year but it is going to be a bumpy ride,” Peter Spencer , chief economist at the Item Club and a former Treasury official, will say. “There could still be substantial pain.” Gross domestic product rose 0.2 percent in the July- September period, the first increase in six quarters, according to the median of 33 forecasts in a Bloomberg News survey. From a year earlier, output dropped 4.6 percent, the survey showed. The Office for National Statistics will release the data on Oct. 23. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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ECB, Bank of England Leave Rates Unchanged to Support Economic Recoveries

October 8, 2009

By Gabi Thesing and Brian Swint Oct. 8 (Bloomberg) — The European Central Bank and the Bank of England kept their benchmark interest rates at record lows to support a recovery from the worst economic slump since World War II. The ECB left the main rate at 1 percent and President Jean- Claude Trichet signaled at a press conference in Venice that the ECB has no plans to raise borrowing costs, describing their level as “appropriate.” The U.K. central bank kept its rate at 0.5 percent and maintained a program to buy 175 billion pounds ($278 billion) of government bonds with newly created money. European policy makers are trying to keep their recoveries on track as unemployment rises and an ongoing credit squeeze hurts company investment. Trichet declined to signal heightened concern about the dollar’s 17 percent slide against the euro since February, reiterating his stance that the U.S. administration’s stated preference for a “strong dollar” is “important.” “Both central banks are on hold until the summer of 2010,” said Peter Dixon , an economist at Commerzbank AG in London. “There’s no doubt that European economies are in a fragile state. There’s a lack of domestic demand in the U.K. and the euro zone. Banks are a concern in both areas.” The euro and the pound were little changed after the decisions. Europe’s single currency traded at $1.4740 as of 3:28 p.m. in London. The pound was at $1.6070. The Bank of England didn’t publish a statement with its decision today. Trichet’s comments on the economy chimed closely with remarks at last month’s press conference. A Bloomberg News survey before the decision showed economists don’t expect the ECB to raise rates before the third quarter of 2010. ‘Uneven’ Recovery “The recovery is expected to be rather uneven,” Trichet said. “It will be supported in the short term by temporary factors but will be hampered in the medium term by balance sheet issues at financial and non-financial institutions.” The economy of the 16 euro nations probably emerged from recession in the third quarter as government stimulus measures, such as “cash-for-clunkers” programs, boosted consumer spending and a global recovery began to rekindle export demand. The ECB has also flooded the banking system with cheap cash in the hope they will lend it on to companies and households. The euro’s gain may hamper the recovery by making exports more expensive. Trichet today repeated the Group of Seven’s standard line on currencies, saying “excess volatility and disorderly movements” hurt growth and policy makers will cooperate “as appropriate.” Smoother Lending While the ECB has focused on lubricating bank lending in an effort to revive growth, the Bank of England is pushing money directly into the economy through the purchase of government and corporate bonds. Policy makers will use new forecasts next month to appraise the plan, which prompted a split on the committee in August when Governor Mervyn King favored spending even more. Former Deputy Governor John Gieve said in an Oct. 6 interview that officials may consider an expansion in November because they will be wary of a “false dawn” for the economy. Conservative leader David Cameron today countered that the policy will lead to inflation, signaling to his party’s annual conference that it would stop the government’s main economic stimulus program if it wins the next election. “Sometime soon that will have to stop because in the end printing money leads to inflation,” Cameron said. David Blanchflower , another former Bank of England official, dismissed Cameron’s comments as “dangerous” and “bizarre.” “This is the most wildly dangerous thing I have seen in a hundred years of economic policy in Britain,” he said in an interview today. He said the Conservative opposition is “showing no understanding of economics. To remove QE and cut public spending is like a return to 1937 — it could drive the economy into depression. This is the most bizzare set of economic policies I have ever heard.” To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net ; Gabi Thesing in Frankfurt at gthesing@bloomberg.net .

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RBS Faced Risk of Full Seizure by Brown at 2008 Crisis Climax, Gieve Says

October 6, 2009

By Brian Swint and David Tweed

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Asking Prices for U.K. Homes Rise as Confidence Improves, Rightmove Says

September 20, 2009

By Brian Swint Sept. 21 (Bloomberg) — U.K. home sellers raised asking prices in September as confidence in the property market improved and the supply of homes dwindled, Rightmove Plc said. The average cost of a home increased 0.6 percent to 223,996 pounds ($364,000) after falling 2.2 percent in August, the owner of the U.K.’s biggest residential property Web site said today in a statement. Price gains in London, the southeast and East Anglia outweighed declines in the rest of England and Wales. “ Confidence is up, stock is down and the number of people searching is high,” Miles Shipside , commercial director at Rightmove, said in the statement. “The recession appears to have hit prices harder in the north.” The U.K. property market is showing signs of recovery as the country emerges from the worst recession in at least a generation. The Bank of England this month kept the benchmark interest rate at 0.5 percent and maintained a program to buy bonds with newly created money to stimulate the economy. Prices increased on the month by 0.9 percent in London, 1.5 percent in the southeast of England and 8.4 percent in East Anglia. The biggest decline was in Yorkshire and Humberside, where the average price of a home fell 3.6 percent. There are some signs that banks are becoming more willing to lend money and that demand for home loans is increasing. U.K. mortgage approvals by the nation’s six biggest banks increased to the highest this year in August, the Bank of England reported last week. Good Time Surveyors reported more gains in home values than declines for the first time in two years, a report by the Royal Institution of Chartered Surveyors showed on Sept. 15. A majority of Britons say now is a good time to buy a home, a survey by the Building Societies Association showed last week. The recession may also be easing for companies. An index showed 0.09 percent of U.K. companies failed in August, the lowest level this year, Experian Plc, the world’s biggest credit-checking company, said today in a separate report. Unemployment is at the highest level since 1995 and central bank Governor Mervyn King said last week that joblessness will keep rising even after the economy starts growing again. Andrew Sentance , a Bank of England policy maker who said last week that the economy may be turning around more quickly than he had expected, will deliver a speech today in London. The next interest-rate decision is Oct. 8. To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

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Goldman’s O’Neill Sees `Silly September’ as Yen Appreciates Against Dollar

September 14, 2009

By Brian Swint and Rishaad Salamat Sept. 14 (Bloomberg) — Foreign-exchange markets have embarked on a “silly September” as traders focus too much on government debt in the U.S. and U.K. while pushing up the value of the yen, said Goldman Sachs Group Inc.’s Jim O’Neill . “There is a very popular notion that you’ve got to sell the pound and the dollar because of the rising government debt, whereas the one that everyone’s seemingly buying is the yen,” O’Neill, head of global economic research at Goldman, said in Bloomberg Television interview in London today. “It’s ridiculous” and “I think of it as ‘silly September.’” Currency strategists are trying to calculate which economies will benefit most from signs of a global economic recovery. While the dollar has dropped 11 percent in the past months on a trade-weighted basis, the yen has appreciated 9 percent against the U.S. currency and 6 percent against the pound since April. “If I look at the underlying fundamentals, virtually everything that drove the yen stronger in its floating exchange history isn’t there anymore,” O’Neill said. “The yen doesn’t deserve to be anywhere near this, and I don’t see it lasting.” The Democratic Party of Japan, which won the election last month to oust the Liberal Democratic Party that had governed Asia’s biggest economy for all but 10 months since 1955, has pledged not to increase new bond sales to avoid expanding a debt burden that’s the largest in the industrialized world. The Japanese economy grew at an annual 2.3 percent in the second quarter. The yen rose as high as 90.21 against the dollar today, the highest level since Feb. 12. The currency traded at 90.79 against the dollar as of 10:28 a.m. in London. Stiglitz Comments O’Neill said that the world economy is in better shape than it was a year ago, in contrast to Joseph Stiglitz , who said yesterday that the U.S. economy is “far from out of the woods” after the government allowed Lehman Brothers Holdings Inc. to collapse a year ago. “It looks like the third quarter is going to be pretty strong for many countries,” O’Neill said. “The underlying message seems to be that the emerging world seems to getting through it better than the developed world.” O’Neill also disagreed with Stiglitz by saying that gross domestic product is probably still the best measure of wealth. Stiglitz is urging world leaders to drop a “fetish” for focusing on GDP in favor of broader measures of prosperity. “It’s the perennial search for happiness,” said O’Neill, suggesting that people might be as well off watching his favorite soccer team. “Our profession and others have been trying to find the right measure of contentment, and happiness I think is what Joe seems to be on about for a long time. Maybe everyone should become Manchester United fans, I don’t know.” Manchester United finished the last soccer season at the top of England’s Premier League. The team came from behind to beat Tottenham Hotspur 3-1 on Sept. 12. To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net ; Rishaad Salamat in London at rishaad@bloomberg.net .

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G-20 Finance Chiefs Agree to Sustain Economic-Stimulus Plans, Discuss Exit

September 5, 2009

By Gonzalo Vina and Brian Swint

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G-20 Finance Chiefs Vow to Sustain Economic-Stimulus Plans, Discuss Exit

September 4, 2009

By Svenja O’Donnell and Brian Swint

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Lehman Collapse `Alarmed and Surprised’ Gieve After Rescue of Bear Stearns

August 17, 2009

By Jennifer Ryan and Brian Swint Aug. 17 (Bloomberg) — Lehman Brothers Holdings Inc.’s collapse in 2008 surprised former Bank of England Deputy Governor John Gieve because the rescue of Bear Stearns Cos. led him to assume U.S. officials would save investment banks. “I remember being alarmed and surprised,” Gieve, the central bank’s financial stability chief at the time, told BBC Radio 4 in an interview broadcast today. The U.S. government’s actions on Bear had “established a strong presumption that it would do what was necessary to prevent a collapse of an investment bank as well as a commercial bank.” U.S. officials didn’t share much information with the Bank of England as they struggled to save Lehman, Gieve said. The investment bank announced on Sept. 15 it had filed for bankruptcy after negotiations at the New York Federal Reserve to engineer a rescue by its peers failed. “This was the weekend so I think I was patched in on various calls through that evening to the U.S. to get the latest news,” Gieve said. “I must say that we didn’t get a lot of news, we were told hour after hour that they would have some news shortly.” U.S. officials were unable to broker a rescue of Lehman after talks including Treasury Secretary Henry Paulson and the heads of as many as 14 financial institutions. The U.K.’s Financial Services Authority blocked a rescue by Barclays Plc . ‘Biggest Mistakes’ Questioned about the contribution of Britain in causing the financial crisis, Gieve said that the most serious errors were made in the U.S. “We’re the tail, not the dog here,” Gieve said. “This whole crisis was born in the U.S. and the biggest mistakes that led up to it were made in the U.S. We made some of the same ones but we’re not big enough to shape the world.” Lehman’s bankruptcy filing led to a loss of confidence that jeopardized funding for banks around the world. Gieve said his main concern then was the focus that would follow on some U.K. financial institutions. “I knew one thing that it would do was lead the markets to focus on who’s next,” Gieve said. In the U.K., “the people in the firing line were Bradford & Bingley which had been struggling through the summer, and HBOS. Beyond that, of course was RBS, Barclays. The only question was: well how far will this wave go?” Gieve, asked about his time on the bank’s rate-setting panel, said Governor Mervyn King never tried to “browbeat” the Monetary Policy Committee. “As chairman of the MPC, he acted entirely properly,” Gieve said. “He gave his views. They were influential — of course they were influential. Outside the MPC, the bank is more of a monarchy,” he said, citing the money-markets division as an example. King doesn’t deserve to bear most of the blame for any mistakes made in the crisis, Gieve said. “Looking back on this, the arrangements we set in place for economic and financial policy didn’t work as well as we wanted,” Gieve said. “I don’t think you can blame this on an individual being over-mighty.” To contact the reporters on this story: Jennifer Ryan in London at Jryan13@bloomberg.net ; Brian Swint in London at bswint@bloomberg.net .

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King May Increase Rates Sooner Than Bernanke as U.K. Inflation Leads G-7

July 27, 2009

By Brian Swint

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U.K. GDP Will Drop 4.4% in 2009 Before 2010 Recovery, Forecast Will Show

July 19, 2009

By Brian Swint July 19 (Bloomberg) — The British economy will shrink 4.4 percent in 2009 before recovering in 2010, Ernst & Young’s Item Club will say tomorrow. The forecast by the research group, which uses the same economic model as the U.K.

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