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BP’s $8 Billion Share Buyback Program Leaves Investors Cold

April 11 (Bloomberg) -- BP Plc Chief Executive Officer Bob Dudley came under pressure from investors to boost the share price at today’s annual general meeting.

While Dudley surprised analysts in March by announcing an $8 billion buyback, the stock price has remained little changed since and a shareholder today asked Dudley if the move would add value. The U.K.’s second-largest oil producer has spent $300 million on shares this year and expects the program of repurchases to take about 18 months.

“They’ll be disappointed with the share-price reaction,” said Peter Hutton, an analyst at RBC Capital Markets in London. “That doesn’t mean the reaction was wrong. We don’t see BP offering growth better than anyone else’s.”

The value of BP remains 30 percent below its level before the Gulf of Mexico oil spill three years ago, which forced Dudley’s predecessor out. Selling more than $50 billion in assets and becoming a shareholder in Russia’s state-run oil producer, OAO Rosneft, has yet to revive the share price and the company is embroiled in a U.S. trial that could saddle BP with billions of dollars in fines.

“Dudley is beyond his honeymoon period,” said Colin McLean, co-founder of Edinburgh-based SVM Asset Management, which holds BP shares. “It looks like the buyback was responding to pressure. People want to see a growth strategy and the Russian bet pay off, but that will take time. Meanwhile, the U.S. is rumbling on.”

The share buyback program is a one-time event and isn’t being carried out at the expense of other projects the company could be investing in, Chairman Carl-Henric Svanberg told today’s AGM.

No Intention

BP has no intention of making buybacks a regular feature because it would probably mean the company having to spend more money when the share price is high, he said.

The buyback, approved by BP’s board within hours of closing the Rosneft deal, fulfills a promise to offset the dilution to earnings per share following the loss of dividends from Russian venture TNK-BP. The projected dividends from BP’s Rosneft stake won’t be as high, leading Chief Financial Officer Brian Gilvary to signal a buyback of about $4 billion last year. BP shares jumped 1.9 percent on March 22, the day a buyback of double that value was announced.

“Shareholders think we’re undervalued,” Dudley told journalists after the AGM. “While the share price hasn’t moved that much” since the buyback, “if you compare us to the FTSE and to others, we’ve started to differentiate ourselves. But the effect will only be felt over time.”

Little Changed

BP was little changed at 451.70 pence today, close to the level when the buyback was announced and only 2.6 percent higher than when Dudley took over on Oct. 1, 2010. Royal Dutch Shell Plc, the largest U.K. oil company, is unchanged this year, compared with a 6.3 percent gain for BP. The benchmark U.K. FTSE 100 index is up 8.8 percent.

“They’ve outperformed Shell this year, but it’s not clear how much is because of the buyback,” said Iain Reid, an analyst at Jefferies Inc. in London. “If you’ve got excess cash you can’t invest right away, in principle it’s the right thing to do. It’s difficult to know what buybacks do to the share price. I wouldn’t say it’s been successful or unsuccessful so far.”

BP has so far purchased more than 42 million shares at a cost of about $300 million, according to the company’s website. It said it will use the remaining $4.5 billion in cash from the TNK-BP deal to pay down debt.

Smaller Base

Dudley reached BP’s $38 billion divestment target a year early as he focuses on the company’s most profitable assets. BP said March 22 that the buyback will also compensate for the smaller asset base, which has shaved production by about 150,000 barrels of oil equivalent a day.

BP has sold off half its upstream installations such as oil platforms, a third of its wells and half of its pipelines, Dudley said in December. Still, the sales shed just 9 percent of the company’s production and 10 percent of its reserves.

The buyback “is certainly not a waste of money,” said Ivor Pether, a fund manager who helps oversee about $15 billion at Royal London Asset Management and holds BP. “If you’re not getting absolute growth in production, it’s equally valuable to get production growth per share. I can understand a buyback as opposed to a special dividend, which might have grabbed more headlines ahead of an outcome of the trial.”

In the U.S., there’s still a risk that BP could be found grossly negligent for the 2010 spill, which would bring maximum Clean Water Act fines of more than $17 billion. BP this month lost an appeal to halt payments to spill victims from a settlement agreement last year that the company said will cost billions of dollars more than expected.

Trial Continues

The trial over liability for the spill continues in New Orleans after BP and the U.S. failed to reach a settlement on civil claims. In November, BP agreed to pay $4 billion and plead guilty to 14 criminal counts, including 11 for felony seaman’s manslaughter. The company also paid $525 million to settle the U.S. Securities and Exchange Commission’s claim that the company misled investors about the rate of oil flowing into the Gulf.

The buyback is “a signal to the market that BP has financial strength and it can get through its problems,” said Iain Armstrong, an analyst at broker Brewin Dolphin Ltd. in London. “Dudley is telling shareholders I realize you’re unhappy, but we think Rosneft’s a good deal and we’re not going to settle for a bad number in the Gulf of Mexico.”

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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