When two crises hit its US operations within a year and a half, UK oil giant BP saw its reputation drop along with its share price. ‘The last six months have been pretty tough from an IR point of view,’ comments Peter Hall, head of IR for the London-based company. ‘We have been dealing with this almost full-time.’
The first crisis was an explosion at the company’s Texas City refinery that killed 15 people and injured at least 500 more in March 2005. The second crisis saw BP forced to shut down half its Alaskan oilfield in Prudhoe Bay last August after discovering severe corrosion. Both incidents have brought home the link between the $221.53 bn company’s reputation and its valuation.
In September, BP CEO Lord Browne sent out an internal briefing that included information from a survey by PSB Research showing BP’s ratings were at an all-time low with key decision-makers in Washington. The briefing also pointed to the ties between reputation and valuation. At the time, BP’s share price had dropped 10 percent in three months.
This research was part of a series of regular perception studies the company commissions to determine the attitudes of major US decision-makers. In selling a commodity, BP is reliant on how legislators view its business, and the company is conscious that additional laws or taxation could erode investor interest. ‘These opinion-formers are the people who need to understand the company and what we do because they set the rules,’ says Hall. ‘If they get a distorted view, it may affect how they treat the company.’
License to operate
Analysts say the short-term costs of disasters like those that struck BP are minimal compared to the long-term impact they have on the company’s image. ‘BP’s license to operate is its reputation, and vice versa,’ says Jason Kenney, oil analyst at ING Financial Markets. He notes that while the financial impact of the incidents was relatively immaterial compared to BP’s annual net profit, the market reacted by downgrading estimates for the company. ‘There has been a sentiment shift on BP, and the amount of time it will take to change that depends on how management deal with the problem,’ he explains.
What’s interesting is that companies and markets tend to interpret reputation issues differently, notes Jan Lindemann, global managing director of brand valuation at London-based Interbrand. Issuers look at the public relations side, while investors zero in on the financial impact of this damaged asset. ‘The investment community looks at how reputation issues affect the sustainability of the business and future cash flows,’ he says. ‘Ford’s bad reputation affects its forecast over the long term, for instance. Investors do worry about respect and accountability.’
There is also normally a delay between reputation fallout and share price movement, Lindemann adds. ‘Financial measures are always lagging, and they indicate that something has happened,’ he says. ‘If customers are unhappy, a drop in the share price should follow.’ BP’s first share price hit came about three months after the refinery incident but its second drop was pretty much in tandem with the pipeline shutdown, with investors anticipating an immediate impact on the business.
The power of perception
The degree to which share price is married to image is industry-specific. ‘Some businesses, like oil, are simply more dependent on perception because their regulators set targets that can have a direct influence on pricing in the market,’ says Lindemann.
BP’s IR team is well aware of the power of perception in the oil business. ‘You need to have a track record for being able to carry out projects in a safe and timely manner that takes due care of the environment in the country in which you are operating,’ says Hall. He thinks of reputation as a fundamental business driver for BP. ‘This is why, when something goes wrong, you have a major problem to address. Every company is one headline away from the next disaster.’
Much of the media attention surrounding the Prudhoe Bay and Texas City incidents has had a negative bias, according to Hall. In his discussions with investors, he says, they have commented on how different the story told directly by the company is to that portrayed in the mainstream financial media. In fact, negative media coverage helped fuel BP’s communications response. ‘The refinery and pipeline incidents have been picked up and constantly pulled to the fore and we felt that if we left this unchallenged, that would be the opinion that people would get,’ says Hall. ‘We launched a major communications program and went round to major shareholders so they’d understand what happened.’
Over the last six months, BP’s IR group has had numerous meetings with top investors to discuss its handling of these crises. Among other steps the company has taken, it has hired a former federal judge to look into the claim that the company ignored safety warnings from Texas City employees. It has also carried out an audit of every operating unit within the company to safeguard against further incidents and enhanced its environmental and health and safety standards. The purpose of this response is to guard against future disasters as well as to satisfy investors and politicians, notes Hall.
Outreach to major holders has had a positive impact, Hall claims: ‘Investors are now saying, Why don’t you tell us about the exciting things you’re doing?’ However, he does admit that the company is still in the early stages of the lengthy process of rebuilding reputation and share price. And with reports from US officials on both disasters still trickling out, negative media attention continues unabated, particularly in the US market.
Fall from grace
BP’s fall from grace is compounded by the fact that it had previously held itself up as a paragon of environmental safety and concern. It has led the way in responding to global warming by investing in alternative energies and measuring its own CO2 emissions. ‘The ultimate test of how serious a company is about this area is the extent to which it is investing its capital expenditure there,’ says Nick Robins, head of SRI investment for London-based Henderson Global Investors. ‘When investors look at the company’s investment in biofuels, it’s a statement that BP believes this is where it will be generating revenues.’
The company has also invested millions in its ‘Beyond petroleum’ tagline, which is regarded as one of the top 100 global brands, according to a survey by Interbrand and Business Week. The study values BP’s brand at $4 bn.
All this noise about being an environmentally conscious, forwardthinking oil giant doesn’t help when faced with two environmental and safety crises. ‘If you present yourself as being highly focused on these issues, you set yourself up for anybody to knock you down,’ says Hall. He believes managing reputation is also a more tortuous job for a large firm because such companies are always in the public eye. ‘If something happens to a small company that involves a loss of life, it doesn’t get coverage,’ he notes. ‘It’s different if you’re a big company that has long had an emphasis on safety.’
This is also the first time BP’s image has been significantly dented, notes Lindemann. ‘This has affected its previously untainted reputation as a professional operator of oil fields,’ he says. ‘That was undermined because it became apparent that this pipeline was faulty and investments had not been made; analysts then start calculating what the potential damage could be to other oil fields.’ The refinery explosion also forced investors to look at the financial repercussions of such an incident for the first time. ‘We now know how disruptive a major incident in a tight refinery market can be – that is what Texas City has shown us,’ says Robins.
The fact that these disasters took place in a short time period also aggravated the situation, says Kenney. ‘There are management crises every now and then, but a series of incidents like this back to back is rare,’ he explains. ‘Over time, you will see people coming back into the stock.’
Rebuilding reputation
Today, it’s very difficult for BP’s IR team to estimate when the company’s reputation will be back on track. Three years ago BP missed its production and volume numbers by a minimal amount, and that resulted in a dip in share price from which it took two years to recover. ‘Something that had a negligible financial impact took us a long time to get over,’ notes Hall. ‘That incident was smaller than what we have at the moment.’
Recently, the company has suffered more damage to its reputation in the US market following an oil spill at its North Slope operation in Alaska and allegations of price fixing among BP traders. These incidents are prolonging BP’s reputation recovery.
The various investigations and reports from US government bodies and the company’s own panels will start to come out over the coming months and will continue to do so periodically through to the end of the year. These documents will serve to remind the market of both disasters and further delay the process of rebuilding BP’s image. One such report from a federal safety panel was released on October 31; it claims that the company had ‘significant knowledge’ of the problems that caused the Texas City refinery explosion.
Hall says BP’s proactive approach to discussing its strategy with major holders is paying off. ‘The quickest way to recover is to be open and honest with people,’ he says. He also thinks that the company’s growth story is helping deflect professional investors’ attention from the reputation issue. ‘If you have a strategy that is growing over time, you are not constantly firefighting against unexpected events.’
