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Financial Times: BP’s strategy

Published: February 28 2008 02:00 | Last updated: February 28 2008 02:00

As BP’s strategy presentation entered its fourth hour yesterday, weary attenders could have been forgiven for letting their minds drift, perhaps back to a similar event five years earlier. Lord Browne, then chief executive, indicated total production would swell by 1m barrels to 4.5m barrels a day by the end of 2007. As it turned out, BP managed less than half that rise.

That is the company’s problem in a nutshell. Back in February 2003 oil industry valuations were clearly stratified – at the top, on a forward price/earnings ratio about 30 per cent better than the FTSE Eurofirst 300, sat BP, flanked by Shell. In the intervening period, following regular production disappointments, the market has fallen out of love with size. For most of the past year, both BP and Shell have traded in a 10 per cent band beneath that benchmark.

After 10 months at the helm, Tony Hayward, the new chief executive, has set some sensible goals, such as stripping out some of the 11 layers of management between the C-suite and the drill-bit, and increasing exposure to unconventional fuels such as oil sands and liquefied natural gas. BP will also boost its capital spending this year by about 9 per cent to $21.5bn (2003 forecast: $9bn), while scaling down a share buyback programme that had trimmed the company’s equity base by 15 per cent since 2001, without any noticeable effect on the share price.

But Mr Hayward cannot get away from the fact that, thanks to its weighting to mature oil basins, BP has one of the weakest production growth profiles in the industry over the next few years. By Goldman Sachs’ estimates, it will also face the biggest hit from profit declines as a result of higher oil prices under contracts with host governments.

The more modest production target of 4.3m barrels a day by 2012 may be achievable. But given the broken promises, investors will be wary.

Copyright The Financial Times Limited 2008

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