BP's $17 billion loss buoyed by tax credit to help its bottom line

LONDON — BP confirmed Tuesday that Tony Hayward is stepping down as CEO as it posted a massive $17 billion loss for the second quarter of 2010.

The company also stated that $30 billion has been set aside to clean up the Gulf of Mexico after the Deepwater Horizon oil-rig explosion in April.

BP Chairman Carl-Henric Svanberg confirmed in a BBC radio interview Tuesday morning that the company will also "divest assets of $25 (billion) to $30 billion, and that is to make sure that no one hesitates, there is no worry about our ... ability to get through this."

BP also said Tuesday it plans to seek a $10 billion tax credit from the U.S. government because the company has lost so much money from the oil spill.

In announcing its second-quarter results, BP said it would record a $32.2 billion charge against its earnings to reflect the cost of the spill. Under U.S. corporate tax law, companies can take credits on up to 35 percent of their losses.

That means taxpayers could be covering roughly half of the $20 billion pledged by BP for a fund to compensate people and businesses harmed by the disaster.

Policymakers crafted the tax code this way so that companies can spread their profits and losses over more than just a calendar year. Let's say a company earns $100 billion one year and pays the U.S. corporate tax rate of 35 percent, or $35 billion. The next year, the economy goes south, and the company loses $100 billion. Over those two years, the company earned zero dollars, but it still paid $35 billion in taxes.

From the tax code's perspective, the company overpaid in previous years. To rectify this, companies can claim a credit, also at the 35 percent rate, for lost income. Companies can apply the refund to tax bills from the previous two years or, if there's money left from the credit, carry the refund forward 20 years.

Robert Willens, a corporate tax expert, said it's unlikely that BP will give up its tax credit, even in the face of public opposition. The company voluntarily established the $20 billion escrow account for victims of the spill and never promised the government that it would not seek any tax deductions associated with the spill, he said.

Goldman Sachs, however, recently agreed not to ask for tax credits associated with the $535 million it paid in penalties to the Securities and Exchange Commission. But as Willens points out, that was specifically negotiated in Goldman's agreement with the SEC.

"The cost associated with the cleanup and the damage and all that — that's just another cost of doing business from the tax perspective," said Douglas Shackelford, a tax professor at the University of North Carolina Kenan-Flagler Business School. "It's viewed no different from paying salaries or other costs they might incur."

Hayward will be replaced Oct. 1 by American Robert Dudley, 54, who now heads the cleanup operation.

The agreement to install Dudley was "a mutual decision" said Svanberg.

Hayward will take up a directorship with BP TNK, BP's Russian joint venture. He also leaves with a retirement package of $17 million.

Dudley, who was joined by a visibly tired and saddened Hayward at BP's headquarters Tuesday, pledged to stick to BP's commitments in the Gulf, which includes cleaning up the oil and compensating residents.

"We will fulfill the promises we've made," Dudley said at a media briefing in London. "Meeting our commitments is critical for BP's long-term success. Taking over this role, I will not reduce my commitment in the region."

He added that "it's not our intention to exit the U.S. nor do we believe we will have to. We fully intend to maintain those businesses and restore our position in the Gulf."

Despite Hayward's success as head of BP for the last three years, his tenure and his departure will be marked by the worst oil spill ever recorded.

In his farewell statement, Hayward said: "The Gulf of Mexico explosion was a terrible tragedy for which — as the man in charge of BP when it happened — I will always feel a deep responsibility, regardless of where blame is ultimately found to lie."

The company finances remain robust, Svanberg insisted, even though "it will be a different company going forward."

As he confirmed on BBC radio, the company's losses were huge "but the underlying performance of the company is actually strong, it continues to be strong, we have strong assets around the world, we have strong cash flow."

The company's posted losses were "a first estimate," said Svanberg. "It depends on how many claims come in.

"That estimate is also based on our belief that we are not (guilty) of gross negligence," he added.

In keeping with expectations, the company paid no dividends to shareholders for the last quarter.

BP said the planned sales, which represent less than 10 percent of its total assets, would mainly affect its upstream business and leave BP with a smaller but higher quality exploration and production operation.

Svanberg said the sales did not represent a change of strategy but were more about "adjusting the portfolio."

"The charge is bigger than expected, but I'm not disappointed," said Nick McGregor, investment manager at Redmayne Bentley, a stock- brokerage firm in Britain. "They are trying to draw a line under this and get Bob a clean sheet to move forward, but the difficulty is that the litigation challenge persists."

Material from the Los Angeles Times, The Washington Post and The New York Times is included in this report.