THE WALL STREET JOURNAL: BP Pledges to Increase Output, Profit

CEO to Take New Look
At Green-Energy Arm;
Focus on ‘Equity Value’
By GUY CHAZAN
February 28, 2008; Page A13

LONDON — BP PLC Chief Executive Tony Hayward pledged to increase the energy titan’s oil production and improve results at its marketing and refining division, and signaled a shift in its renewable-energy business.
 
Analysts said the shift in emphasis could result in the sale or flotation of some parts of BP’s renewables business or tie-ups with other companies. A BP spokesman said the comments didn’t mean BP had any immediate plans to divest itself of its solar, wind and biofuels units.

In his first strategy presentation since becoming CEO in May, Mr. Hayward laid out his plan to turn around BP’s fortunes. He said BP would see production of around 4.3 million barrels of oil equivalent a day by 2012, compared with 3.82 million last year. He said the company could sustain production of at least four million barrels a day through existing or newly developed projects until 2020, even with no new discoveries or access to new opportunities. But, he added, “We expect to do better than this.”

Investors have long wondered where BP’s long-term growth would come from, with some analysts saying its conservative crude-price assumptions have led it to underinvest in new projects. Mr. Hayward’s comments could help to alleviate some of those concerns. He said BP’s reserve-replacement rate — a closely watched indicator that shows how production is matched by new finds — stood at 112% in 2007 by the standards of the U.S. Securities and Exchange Commission, much higher than for many of BP’s competitors.

But his pledges come at a time when Big Oil finds it increasingly difficult to deliver on growth promises. Output fell at Exxon Mobil Corp., Royal Dutch Shell PLC and BP last year, despite big investment increases. Their mature fields in Alaska and the North Sea are in decline, and access to new resources is narrowing amid rising nationalism in oil-rich countries such as Russia, Venezuela and Kazakhstan. Industry cost inflation means budget blowouts and missed deadlines for many big projects.

“The majors have repeatedly disappointed in terms of their guidance,” says Stephen Thornber, Global Equity Fund Manager of Threadneedle Investments, which holds about 1.1% of BP stock. “The market will want to see evidence of BP’s improved performance before they give them the benefit of the doubt.”

Mr. Hayward signaled a more-pragmatic view of BP’s alternative-energy business, which his predecessor as CEO, Lord John Browne, had taken pains to promote. “We intend to grow this business predominantly for its equity value,” he said in a statement.

“What we will be doing over the course of the year will be looking at ways of realizing that value for shareholders, because none of us believe that there is very much of that, if anything, in our share price today,” he later said in a Web cast for investors. He added that he thought the Alternative Energy unit was valued at between $5 billion and $7 billion. Analysts said they assumed that BP might try to unlock their value through a flotation or sale of some of the business, or by seeking other strategic investors as partners.

In London, BP fell nearly 1% to 561.5 pence ($11.15). On the New York Stock Exchange, BP’s American depositary receipts were down 93 cents, or 1.4%, to $66.45 at 4 p.m. in composite trading.

RETHINKING GREEN
 
• The News: BP vowed to boost production and take a new approach toward its renewable-energy portfolio.

• Behind the News: BP has touted its green strategy, but the business hasn’t yet significantly added to its share price.

• The Backdrop: Like its rivals, BP faces a world where new reserves are harder to find.

Write to Guy Chazan at [email protected]

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