Sunday Herald (Scotland): Hayward to hint at BP recovery despite ‘dreadful’ profit figures

US refineries back in action and new fields opening

By John Phelps
21 October 2007

BP CHIEF executive Tony Hayward is expected to claim that the embattled giant is finally nearing the end of a three-year downward spiral on Tuesday when he is due to confirm news of a further profits setback despite soaring energy prices.

The new boss, who took charge after Lord Browne’s abrupt departure in May, has already warned of “dreadful financial results for the third quarter” and analysts have been scrambling to downgrade expectations over the past fortnight or so.

Now most brokers fear that profits in the summer months may have fallen a full 20% to below £2 billion, some £1 billion below the level achieved in the second quarter even though oil prices jumped by more than 15% during the period.

Much of the problem was down to falling margins and sales from its US refineries, which were operating at less than 75% of capacity at a time when rivals increased their production and American motorists cut back demand in response to higher gasoline prices.

Additionally, BP had to cope with the lasting effects of its Alaskan oil spill, political interference in Russia and delays to projects in the Gulf of Mexico over the summer.

The chief executive has already promised a “fundamental shift” in the way the group carries out its business and is due to give further details of job losses as he removes tiers of management in a bid to contain costs and bring new responsibilities to line managers.

But close followers say he will indicate that the group is already on course to begin its recovery this winter in any event, as its two major US refineries move towards full production by the end of the year after the problems caused by a fatal fire in Texas and new fields in Angola, Mexico and Trinidad begin to build up production.

Figures should be helped also by the latest upsurge in oil prices, which hit $88 a barrel last week as a result of the Turkey-Iraq tensions, up from an average of around $67 in the third quarter and less than $59 in the spring.

There are concerns, however, that the increased price could further hit demand and fuel inflation at a time when the US economy is suffering the effects of its housing crisis In the UK, the Road Haulage Association has warned that truck drivers face “appalling” pressures after the price of diesel pushed through the 100p a litre level earlier this month and has called on the chancellor to reverse recent tax rises.

“BP has had a torrid three years or so and developed a reputation for being accident prone under Lord Browne,” commented one leading broker. “Tony is making all the right noises about getting the group back on track and cutting out the mistakes and he has been helped by the timing of his arrival in the top job.

“Now he has to prove he also has luck on his side.”

Fellow oil giant Royal Dutch Shell is expected to announce a more modest dip in its third-quarter figures on Thursday as a result of squeeze on margins in the US and security problems at its important Nigerian oilfields.

Chief executive Jeroen van der Veer, however, will soften the blow by confirming a further jump in oil reserves as a result of the group’s £11.5 billion capital investment programme.

He is also expected to point to the future benefits to come from the group’s heavy investment in China and in further expanding its vast joint-venture refinery in Texas which is now capable of handling 600,000 barrels of crude a day.

The Anglo-Dutch group, which took a heavy knock as a result of a scandal centred on over-stated reserves back in 2004, has seen its shares comfortably out-perform those of BP for most of the past three years after directors outlined their long-term strategy for future growth.

But some believe that directors could take a short-cut by announcing a takeover bid for one of their smaller rivals in the coming months.

Much of the recent speculation has centred around the £30.5 billion BG group and there have been rumours that Shell has held talks with the Brazilian Petrobas group over a joint approach. Shell declined to comment.

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