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After Settlement, Relief at a Diminished BP

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By STANLEY REED and CLIFFORD KRAUSS JULY 2, 2015

LONDON — BP’s future no longer has a giant cloud ahead. But it will take years, if not decades, for the company to approach its size of five years ago, before the explosion of the Deepwater Horizon rig.

Since the 2010 blowout of the Macondo well killed 11 rig workers and dumped millions of gallons of crude into the Gulf of Mexico, BP has vigorously fought in court and on American television to salvage its image and minimize the costs. But in preparation for a settlement to resolve legal wrangling over economic and environmental damages, in which it eventually agreed to pay $18.7 billion, the British-based company also had pruned its global operations to save itself.

To shore up its finances, it gave up its former ambition to reach the size of Exxon Mobil, the giant of global oil giants. It sold refineries and natural gas fields in the United States, and trimmed its reach across Russia, Central and Southeast Asia, and the North Sea. From the time of the accident through 2012, it sold off $38 billion in assets, and raised $12 billion more in cash from selling its stake in the Russian company TNK-BP.

With the settlement, BP executives breathed a sigh of relief and Wall Street analysts who cover the company declared a victory for it, albeit only compared with the potential damages it had faced. BP and the analysts emphasized that $18.7 billion — an average of just over $1 billion to be paid annually over 18 years — would be a manageable burden for a company that earned a profit of $2.6 billion in the first quarter despite low oil and gas prices.

“It makes me feel like the company can now plan its future,” Robert Dudley, BP’s chief executive, said in an interview. “It allows us to have this manageable cash flow, including increasing a commitment to investment in the U.S., which was increasingly uncertain for us.”

BP’s share price in the United States jumped more than 5 percent on Thursday, closing at $41.29, even though the company will add $10 billion to the $43.8 billion in provisions for cumulative pretax charges that it has already taken.

Wall Street analysts praised the settlement for dealing with almost all of the company’s major liabilities, and its penalties are lower than many expected under the federal Clean Water Act as well as settlements with the gulf states. Payments to the states and federal government will not begin for another year, giving the company relief at a time when revenue is dropping because of the 40 percent drop in oil prices over the last year. Much of the payment will be tax-deductible.

“Every aspect of this deal is better than what both we and the market were expecting,” said Stephen Simko, Morningstar’s director for energy research.

Mr. Simko noted that the agreement gave the company additional financial strength to invest capital it was holding back in new projects, dividends, stock buybacks, and even mergers and acquisitions in a market in which many oil and gas assets are now in distressed condition.

Fadel Gheit, a senior analyst at Oppenheimer & Company, compared the settlement to a 30-year mortgage, which can soften the financial blow, and he estimated that it was half of what the company could have faced.

“BP is now in the best shape since Macondo in terms of looking into the future,” Mr. Gheit said. “The only risk going forward for BP is oil prices, and that is the same for Exxon Mobil or Chevron or any other company.”

Since becoming chief in 2010, Mr. Dudley has reshaped BP into a significantly smaller company that he says is easier to manage and hence safer. In doing so, he has reduced production by close to one million barrels a day, to around 3.3 million barrels a day.

Screen Shot 2015-07-03 at 07.45.01Mr. Dudley has sold off a total of $45 billion worth of oil and gas installations and other assets. Because most of these sales occurred before last year’s price drop, he received much higher prices for these assets than he would have today.

Mr. Dudley has also cut BP’s risk in Russia by selling the company’s 50 percent stake in its Russian subsidiary TNK-BP to Rosneft for $27 billion, including $12 billion in cash and a nearly 20 percent stake in Rosneft.

Even before the settlement announcement, BP had made considerable headway toward restoring the company’s status in the United States, a crucial profit center for the company before the 2010 disaster. While it had a moratorium after the 2010 oil spill, BP is now back drilling in the Gulf of Mexico and has eight rigs working there. A settlement with the Environmental Protection Agency last year allowed BP to resume bidding in exploration lease auctions held by the federal government.

Since oil prices are at $60 a barrel, BP and most oil companies are struggling. But through winnowing down its asset base, the company has put itself in a better position than many of its rivals. With what amounts to an attic clear-out, it has dispensed with a lot of the older oil and gas fields in places like the British North Sea, which because of high maintenance costs for rusting structures have difficulty turning a profit at current prices.

BP has emerged, stripped down, with sound businesses and cash to spend on exploration. The Gulf of Mexico, where BP is rebuilding, is likely to remain a strong profit center. BP is one of the big players in Angola, whose deepwater oil fields play well to BP’s knowledge of geology under seabeds.

BP has also rid itself of unprofitable refineries that have dragged down the company’s performance for years, while investing in its better ones, like the giant refinery at Whiting, Ind.

The biggest risk for BP is Russia, where it owns about 20 percent of the state-controlled Rosneft. But Russia is a world leader in oil and gas resources, and Mr. Dudley figures that the stake in Rosneft, for which he is a board member, is worth maintaining.

“We remain committed to our investment there,” he said. “I just hope that cool heads will prevail” in the politics of all sides.

“BP still has the uncertainty of Russia facing it, given it has so much invested there,” said Brian Youngberg, senior energy analyst at Edward Jones. “Removing much of the remaining uncertainty regarding the oil spill is obviously a positive, but the company needs to now execute well and show it can grow.”

The settlement, which is subject to approval by a federal court, does not end BP’s legal struggles entirely. It still faces numerous lawsuits from shareholders as well as businesses and Gulf residents who opted out of a class-action settlement reached in 2012. The exact amount owed from that settlement is still not entirely determined, and may top the current estimates of more than $10 billion.

Stanley Reed reported from London, and Clifford Krauss from Charleston, W.Va.

A version of this article appears in print on July 3, 2015, on page B1 of the New York edition with the headline: Relief at Diminished BP After Spill Settlement.

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