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Browne Gives BP Amoco State-of-the Union

Browne Gives BP Amoco State-of-the Union

Sir John Browne, BP Amoco's CEO, gave a peek into the integrated energy giant's future Thursday as he told analysts in London of a worldwide three-year plan to cut $4 billion in costs, sell $10 billion in non-core assets, and boost capital expenditures $26 billion. The company's overall goal is to add six percentage points to its return on capital by the end of the three-year period. Browne also announced plans for a shareholder meeting Sept. 1, when the merger with Arco will go to a vote.

"Clearly, absolute profit levels will be determined by actual trading conditions," Browne said. "But this very significant improvement in underlying performance is a target we now believe we can deliver."

After the $10 billion in asset sales, Browne said the company's gas production will increase 5%/year, oil production will be flat for the near future (a three year span) then grow 8%/year, marketing sales will grow 5%/year and chemical sales will increase by 6%/year.

Analysts were not shaken by Thursday's announcement. "This reflects the well-known fact that BP Amoco is dedicated to running a tight ship," said one analyst who wished to remain anonymous. "The numbers are big, but the company is big as well. They did not break any records here. The $26 billion in capital expenditures is right in line with the amount it has spent per year over the past 10 years."

Adam Sieminski, an analyst with Deutsche Banc Alex. Brown, approved of the changes. "This isn't earth-shattering, but I think it's a positive approach. The time frame and the size of the cost cuts and asset sale were bigger than I expected. One potential downfall is that selling assets might lead to reduced production, but if they are going for return on capital improvements, this is a good way to go."

Browne said the company's gas assets in the United Kingdom's North Sea, Australia's Northwest Shelf and throughout North America are able to sustain production of 4.5 Bcf/d for 10 years. He said growth will come from the company's LNG interests in Trinidad and Algeria. The company has interests in multi-billion dollar projects in each country.

Among the assets targeted for the auction block is BP Amoco's 64% stake in Altrua Energy, an oil and gas producer in Texas and New Mexico.

"This is a really attractive asset," said BP Amoco spokesman John Lloyd. "It has 6,300 producing wells in the Permian basin. Each day it puts out 170,000 barrels of oil, 220 MMcf of gas and 20 barrels of natural gas liquids. Altrua accounts for 13% of all oil production in Texas."

The company is also selling its oil interests in Canada, which have been on the market for some time. In total, $4 billion in asset sales will come from BP Amoco's worldwide exploration and production operations.

While other E&P assets may be headed off BP Amoco's balance sheet, the company's Gulf of Mexico (GOM) assets will be bolstered, said Lloyd. "I think its safe to say that a lot of the proceeds from other sales will go into expanding our Gulf presence."

The company's Gulf presence was bolstered on Thursday by the discoveries of major oil reserves in four different GOM wells in which BP Amoco has major interests. One of these discoveries, at the Crazy Horse prospect located in 6,000 feet depths 125 miles Southeast of New Orleans, LA, has estimated recoverable oil reserves of one billion boe, which BP Amoco said was the largest discovery ever in Gulf deep water. The other discoveries in the Atlantis, Mad Dog and Holstein properties contribute a total of 600 million boe. Lloyd said the Crazy Horse discovery was an all-oil find, and the company has not released the amount of gas found in the other discoveries. BP Amoco's total net reserve base in deep-water gulf has now increased to 2.5 billion boe.

Another $3 billion in sales will be put up for sale from BP Amoco's downstream interests. Brown said the company's refining operations will be the most likely to be sold as the company intends to reduce its worldwide refining presence.

"With worldwide refining capacity continuing to grow faster than demand, our expectation is that the global refining margin will average little more than $1 a barrel over the medium term. Our aim, therefore, is to reduce our refining coverage by around a third, which means that the ratio between our own refining supply and the volumes we market will fall to between 60-70% from today's level of 90%." He added that the first disposal will be the 250,00 b/d Alliance Refinery in Louisiana.

Chemical asset sales will total a projected $2.5 million, as BP Amoco tries to minimize low value byproduct production.

The potential additions Arco will make once the merger is approved were not included in these goals. Browne said the merger is on a pace to be approved by the end of this year. Arco's meeting with shareholders is planned to occur in Los Angeles on August 30, the day before Amoco shareholders meet. Browne expects the synergies created from the merger to result in $1 billion of pre-tax, cost-savings in the first two years after approval.

"While Arco will represent only 15% of the total market capitalization of BP Amoco, it will strengthen the portfolio, particularly in gas and the US downstream. It will also give us great new opportunities in Alaska and further potential for future growth in Asia."

Sieminski said more cuts may be announced after the Arco merger gets approved. "We're headed for another round once the Arco deal is set," he said. "They won't be comparable to the size of these cuts, but this is definitely not the end of the slashing."

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