Results in focus
Results in focus
Large, international oil companies, such as BP, ExxonMobil, Shell, Chevron, Total and ConocoPhillips, are often described as ‘supermajors’. The term dates back to the mega-mergers of the late 1990s and denotes firms that have grown to a massive scale. Their global operations stretch from finding oil and gas deep beneath oceans and deserts, to selling hydrocarbon products to consumers around the world.
The conventional wisdom has been that such companies are, by definition, integrated enterprises – operating in every part of the supply chain – working oilfields from discovery to depletion, running refining and marketing operations across major consumer markets and working in all areas of the downstream, from gasoline and diesel to the full suite of lubricants and chemicals derived from hydrocarbons.
Today, however, as the energy industry becomes more complex and competitive, many companies are beginning to vary the model. ConocoPhillips, for example, has chosen to operate its upstream and downstream as two separate, standalone businesses. In BP’s case, the question has been how to create long-term value in a way that builds on and complements a rigorous and continually improving approach to risk management.
Distinctive skillsThe answer for BP’s group chief executive, Bob Dudley, lies in doing what BP does best – and, therefore, not trying to do everything. In a speech in Oslo this February, he said: “A supermajor can’t be super at everything,” before highlighting the areas in which he believes BP has built distinctive skills and technology – exploration, deepwater activity, giant fields, gas value chains, a world-class downstream business, technology and relationships.
The plan is that by investing in these areas, where it has most competitive advantage, and divesting businesses that are less competitive, or less well-positioned, BP will focus its dollars on the assets that create the most value.
So, for example, BP is increasing its spending on exploration, and focusing on upstream projects that have high cash margins – the net cash provided by operations divided by the number of barrels produced.
In the US, where demand for gasoline and diesel is declining, it is investing in refineries at Whiting, Cherry Point and Toledo, which can process many different types of crude oil and are well placed to serve large consumer markets. Meanwhile, it is divesting the Texas City and Carson refineries, which are less strategically positioned and well configured.
It’s increasing the proportion of premium lubricants it sells, but selling off part of its liquefied petroleum gas (LPG) business, including bottling and tank filling. BP has also divested a number of mature oilfields, which it believes other companies are better placed to operate, as well as smaller upstream businesses, such as those in Vietnam and Pakistan.
One of the biggest changes of emphasis is that BP is asking investors to measure its progress by how much operating cash it generates rather than simply how much oil it produces. The logic is that long-term value depends not only on volume, but on the margins derived from each barrel – quality as well as quantity.
Playing to strengthsOutlining the strategy to investors in February 2012, Dudley said: “Our period of consolidation is over. Now, it’s time to deliver investment, growth and value – achieved by playing to our strengths. That means making choices. We are choosing value over volume – measured in cash flow not barrels. We are choosing strategic assets over non-core ones. We’re investing more in the front-end of exploration, and divesting mature assets that others can derive more value from. So, we are choosing not to try to be the biggest – but over time, to aspire to be the best: a safer, stronger and simpler BP.”
All of this is encapsulated in BP’s 10-point plan, in which point one is a ‘relentless focus on safety and risk management’ and point two is ‘playing to BP’s strengths’. The plan also outlines BP’s intentions to strengthen its portfolio through ‘active portfolio management’ – acquisitions and divestments; making the business simpler through standardisation; and providing investors with more detail on individual businesses.
Measures of progressMeasures of progress include bringing higher margin operations onstream and maintaining a strong balance sheet.
The expectation for operating cash flow is to generate around 50% more annual operating cash flow by 2014, compared with 2011.* The extra cash will be shared around equally between investment in the company’s pipeline of growth projects and other purposes, including dividends to shareholders.
Dudley told investors: “Our vision is to build an ever-stronger portfolio, upstream and downstream, generating sufficient cash, both to invest in our pipeline and reward those who invest in us as the circumstances of the firm improve.”
YEAR BY YEAR – HOW THE PLAN IS UNFOLDING2011 – ‘SOLID’ RESULTS
BP described 2011 as a ‘year of consolidation’ with a major emphasis on safety and a large number of maintenance ‘turnarounds’. Nonetheless, the company turned in what Dudley called a ‘solid’ set of results, with profits rising 6%. Highlights include:
2012 – ‘A YEAR OF MILESTONES’
In 2012, BP expects to pass several milestones as it implements its 10-point plan. These include increases in exploration, new projects and capital investment:
2013-2014 – FINANCIAL MOMENTUM
In 2013 and 2014, as investment continues, BP expects to see greater financial momentum. Main developments are planned to include: