London Evening Standard; New boss at BP struggling to stop rot

Robert Lea, Evening Standard
8 October 2007, 12:13pm

Dreadful. It’s the word that BP chief executive Tony Hayward has chosen to describe the oil major’s operational performance. And it is the word that sparked the latest sell-off in shares of a giant that the City is finding difficult to trust.
 
As the oil price hovers around record highs of $80 a barrel, many economists and analysts like those at Goldman Sachs believe it is but a staging post on the way toward the $100 barrel.

The price has quadrupled over the past decade, bringing back the twin spectres of the £1-a-litre petrol price and £1000-a-year household energy charges once the gas price has been dragged back up, as well as the rising general costs that forced the Bank of England to admit it had failed to keep a lid on inflation.

Yet in an environment in which BP shares should have been booming, they have effectively flat-lined.

So what is so rotten in the state of BP? Its problems from Prudhoe Bay through Texas City to the Gulf of Mexico and over to Battersea Park – that’s Alaskan environmental disasters, fatal refinery explosions, badly delayed big projects, and the perjury that did for formerly fêted chief executive Lord Browne – are well-documented.

Collectively they have added up to outages and delayed projects that sent BP profits tumbling 13% at the half year (when rival Royal Dutch Shell was soaring to new records) and led to swingeing cuts in production forecasts that will see an increase in liftings of little more than 10% in the next five years.

That investors should have been so nervous when news mischievously leaked at the end of last month that Hayward had had a Gerald Ratner moment and told staff at a get-together in Houston that the firm’s performance was ‘dreadful’ indicates just how jittery BP watchers have become.

Hayward had said much the same thing in July at the half-year results except he used the more prudent phrases ‘ not good enough’ and ‘disappointing’.

The conspiracy theorists hiding behind dark glasses in the City have concluded that the BP spin machine – remember this is an organisation that only recently lost the services of Tony Blair’s former spinstress Anji Hunter – was effectively putting out a thirdquarter profit warning so the ninemonth results out later this month will not come as a shock.

Not so, say the BP spinners, who point out that Hayward was only talking of operational performance and that the financial performance is still in line, which really it could not fail to be given the trading quarter when the price of oil hit an all-time record.

Whichever, 23 October – the scheduled day for its Q3 figures – promises to be a watershed for Hayward’s New BP. Its operational problems should be at least under control or the City will want to know what he has been doing all year as chief executive-elect, and then the boss himself.

More, the nods and winks from St James’s Square are that Hayward will be unveiling his big strategic review which could mean a major restructuring. But again BP watchers should not be so surprised, though job cuts may not be the answer the indications are that Hayward will be ‘re-allocating’ of staff.

He has already said he will cut through the 11 layers of management that cascade down from him to the drill bit. And he has already said he aims to get 100 penpushers back out of head office and into the field being engineers again.

All this, say some, could be the inflection point that ushers BP into a new golden age when its delayed projects at last start coming on stream, production targets are bested and the share price goes north.

Maybe. In just the past week, two exploration and production veterans – one a director of a FTSE 100 company, the other a former BP man now running his own show – have in private conversation said exactly the same thing: ‘I wouldn’t want to be in Tony’s shoes.’

Perhaps newspaper sub-editors will not be locking away those Hayward and ‘in a pickle’ headlines just yet.

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