Edited by Iain Dey
Last Updated: 11:37pm BST 29/09/2007
Tony Hayward, the chief executive of BP (567.5p), was caught off guard last week when comments from a staff meeting leaked into the public domain. He warned that third-quarter results from the oil major would be “dreadful” and a strategic overhaul is imminent.
While the news knocked BP’s shares, there was nothing in Hayward’s comments that came as much of a surprise. Analysts had been anticipating awful results from BP in Q3 – with production targets and profit targets all missed – and had already factored this into the share price.
There does not appear to be a looming black hole at BP. Yes it has issues, but so do all of its peers. Large cap oil companies have all been hitting operational difficulties in recent years as they struggle to keep up with the continued strong demand for oil. Exxon and Shell have also been flagging up issues.
Ironically, the issues they have encountered on the production side have contributed to an ever-rising oil price, helping to mask the problems in their profit lines.
BP is missing output from several projects hit by delays. But these are coming on-stream over the next few months. The Greater Platonio project in Angola and the Atlantis development will be contributing to next year’s figures. Thunder Horse, the Gulf of Mexico development brought to its knees by hurricane damage, will also be back on track next year. Some analysts forecast these projects could lead to $1.2bn or more in profits come 2008.
Hayward’s restructuring is expected to strip the current 11 layers of management down to seven. That comes as part of a broader plan to get more staff back to the front line, correcting the under-investment in engineering that has been partly behind the recent issues.
Those plans are expected to be unveiled in the next few weeks, ahead of the Q3 figures on October 23 – and are likely to be well-received in the City.
In the long term the oil price is likely to remain high. BP may take a while to become flavour of the month again, but these shares are worth buying to hold for the longer-term. Buy.