BP plc will be the first of the oil majors to deliver 2Q2007 earnings results Tuesday, but analysts and investors likely will be paying as much if not more attention to the new man behind the microphone as they will be to the London-based producer’s numbers.

Tony Hayward took over as CEO on May 1 following the retirement of John Browne (see Daily GPI, May 2), and he has the job of restoring investor confidence following a series of tragic accidents, operational problems and regulatory problems — many in the United States.

Hayward’s step up the ladder comes at an opportune time for the company, which is the biggest gas producer and top marketer in North America. Browne had presided over a slew of problems in the final years of his well regarded tenure, and though many issues remain unresolved, Hayward is attempting a more collegial, team-building style, two Houston BP employees told NGI.

For example, to symbolically demonstrate the shake-up at the top, Hayward reportedly turned Browne’s former executive suite in London into a meeting room, and he and BP Chairman Peter Sutherland now have offices across the hall from each other. Now, as he steers the company forward, Hayward has to build investor confidence by showing he can make money and build production. BP has failed to beat energy analysts’ estimates since 2Q2006.

Even with record oil prices, energy analysts slot BP’s earnings forecast at the bottom of the pack. Wall Street analysts expect BP’s profit excluding special items will fall 18% to $5.055 billion from $6.11 billion in 2Q2006 — the worst of the peer group. Oil and natural gas output is forecast to drop by around 4%.

BP and other majors are expected to blame outside factors, such as unplanned maintenance and terrorism, for their lack of worldwide production growth and an overall drop in earnings. However, energy analyst Paul Hiches said the majors are paying the price for efficiency and profits following a heady period of mergers that reduced the producer universe — and unwittingly challenged the smaller workforces.

“The drive for rationalization removed whole tiers of production expertise, and the oil companies did not really resume recruitment until around 2004,” Hiches said. “As a result, the average age of all oil service managers is now around 54…The shortage of expertise places a limit on just what can be done, and I fear that companies will have to run hard to stand still on the production front for some time to come.”

Analyst Jim Jubak said the majors “don’t have a good place to put those profits back to work. A big share of today’s oil exploration and development capital expenditures [is] unlikely to earn back a reasonable return on the money invested. The prices paid for today’s assets are too high, the costs of development are rising too fast and the risk that politics will prevent full production in the future is too great. That’s why you see companies across the industry buying back shares or increasing dividends and waiting — hoping, really — that the price of investing in future production growth will fall.”

Jubak said the more profitable a producer is, the bigger the problem. “If an oil company earning an 8% return on its capital can find a project that will pay back 10%, that’s a win. But if the oil company is earning 24% on its capital, as ExxonMobil is right now, a project with a 10% return is a complete nonstarter.”

Houston-based ConocoPhillips, which has so far failed to build its gas output following its acquisition of Burlington Resources Inc., unveils its earnings on Wednesday. On Thursday, Irving, TX-based ExxonMobil Corp. and Royal Dutch Shell plc, which both have a growing profile in some of the prolific North American basins and in deepwater plays, are scheduled to report. And Chevron Corp., which also has its hand in some of the biggest deepwater projects and onshore basins, finishes for the majors on Friday.

Also set to release quarterlies in the coming days are several of the largest U.S.-based exploration and production (E&P) companies. Overall, the North American independents are expected to show stronger gas production from a year ago — as much as 19% higher, according to one analyst. Occidental Petroleum Corp. (Oxy), XTO Energy Inc. and Pogo Producing Co. will report on Tuesday; Cabot Oil & Gas Corp., EnCana Corp. and Questar Corp. are set for Wednesday; and Newfield Exploration and Apache Corp. follow on Thursday.

SunTrust Robinson Humphrey/the Gerdes Group’s (STRH) E&P portfolio is expected to show quarterly earnings “moderately” above consensus, said analyst John Gerdes. The STRH portfolio, which includes some of the largest gas producers in North America, is expected to report 10% lower sequential earnings per share (EPS) from 1Q2007 and 1% lower cash flow per share (CFPS).

“Compared to a year ago, 2Q2007 EPS should fall 14%, while 2Q2007 CFPS should increase about 5%,” said Gerdes. “Oil prices were about 8% lower, while natural gas prices were about 11% higher than the year-ago quarter, and production is estimated to be about 19% above the year-ago quarter. The strong year/year decline in 2Q2007 EPS is largely a reflection of 16% higher noncash/unit DD&A [depreciation, depletion and amortization] expense, which more than offset meaningfully stronger production.

“The moderate year/year increase in 2Q2007 CFPS is attributable to strong production growth and higher natural gas prices more than offsetting weaker oil prices and 2% higher per unit operating/overhead expense.”

Despite the lower gas prices, the Raymond James & Associates Inc. energy team noted that the energy sector continues to outperform the market, and “this trend will continue,” said analyst Wayne Andrews. He noted that the five-year growth of the S&P 1500 E&P Index is up 31%, versus 28% for oil service stocks and 13% for the S&P 500.

“The current returns in the sector are outstanding,” he said, and “despite near-term gas price concerns, the current up cycle is intact.” By historical standards, E&P valuations are at the low end of the range, and “industry profitability should lead to multiple expansion.”

Among the U.S.-based independents STRH covers, Gerdes expects Anadarko Petroleum Corp., ATP Oil & Gas, Edge Petroleum, Goodrich Petroleum and Whiting Petroleum to “soundly exceed” quarterly earnings consensus expectations. On the downside, Bill Barrett Corp. and Compton Petroleum will “solidly miss” consensus estimates.

Fort Worth, TX-based XTO is another independent expected to show strong returns profit- and production-wise, said Gerdes. “XTO should exceed by 1% the high end of 2Q2007 and 2007 production guidance. Notably, XTO can generate 10% organic production growth spending 25% less than cash generation given a mid-$7 gas and mid-$60 oil price environment.”

Raymond James analysts like Oxy among the large-cap E&Ps, and among the small- and mid-cap energy stocks they pick Bois d’Arc Energy, EV Energy Partners, InterOil Corp. and Parallel Petroleum as a few expected to show solid returns in the quarter.

“The accelerating MLP [master limited partnership] and merger and acquisition trends highlight attractive valuations,” said Andrews. “Despite recent weakness, there is a sustainable increase in the natural gas price floor.”

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