Admitting that the company’s “investment phase” has slowedearnings growth for the past 18 months, BP Amoco Plc’s CEO Sir JohnBrowne yesterday predicted investors will see a 10%/year return oninvestment for the next three years, fueled by a 13% increase incapital spending, slashed costs and increased productivity.

Browne deflected criticism that the company has not performed aswell as rival high earners Total Fina Elf SA and Lasmo Plc,attributing BP’s lagging earnings to its numerous and expensiveacquisitions in the past 18 months.

In the past year, BP shares have remained relatively stagnant onthe New York Stock Exchange, fluctuating between $43 and $62 pershare. On July 5, Merrill Lynch downgraded BP stock from”accumulate” to “neutral.” In contrast, in the past year, TotalFina has gained 24%, and Lasmo has gained 20%.

“There is no question of us taking a pause in earnings growthwhile we go through an investment phase,” Browne said. “We willwork our existing assets, as well as the new ones, so that the newlevel of performance can be achieved without any such pause.”

Browne, who said the company was ready to “move from a phase ofretrenchment to a phase of expansion,” said his management team hasdetermined that in the next three years, capital spending, notincluding new acquisitions, will be accompanied by a continuingfocus on unit costs, and improved productivity from its existingassets.

BP’s capital spending will be $13.5 billion a year for the nextthree years. The energy giant will match the capital spending withasset sales of at least $1.5 billion a year to improve itsportfolio.

“This means our total net investment will average around $12billion per annum, so capital employed should grow by around 4% to6% a year,” Browne said. “Add to that improved productivity ofbetween 4% and 8% a year, which we believe we can achieve acrossthe group, and we can see bottom-line growth of 10% a year andpossibly more.”

Overall, BP plans to direct $8 billion a year of its spendingtoward oil and gas investments. Most of the spending will be innatural gas, which will see an increase of 8% to 10% a year.

Browne predicted that natural gas will represent more than 40%of the company’s overall output by 2003, and at the same time,crude oil production is expected to rise by 4% to 5%.

BP also will cut its overhead, reducing annual costs by $5.8billion by the end of 2001, which will net $4.7 billion in savingsby the end of this year, said Browne.

New investments will continue, focusing more money on BP’srelatively young power marketing business, which is expected to seean influx of about $400 million in annual spending.

In fact, on Monday BP announced it will purchase Idaho’s IGIResources Inc. IGI sells gas and power to mostly industrial energycustomers in the Northwest, and has sales of 600 MMcf/d of naturalgas. It also manages pipeline and storage capacity.

More expensive acquisitions have already been completed,including Amoco Corp., Atlantic Richfield Co. (Arco) and BurmahCastrol Plc (see Daily GPI, Aug. 17, 1998; April 5, 1999).

The most promising projects for the future at BP are oil andnatural gas discoveries in Trinidad and in the deep waters of theGulf of Mexico. Appraisal wells currently drilling in the CrazyHorse and Atlantis fields in the deep water Gulf of Mexico are”strongly” encouraging, said BP Exploration CEO Dick Olver.

“In Crazy Horse, we have two active wells showing excitingmultiple zones, some not seen in the original discovery well,” saidOlver. “In Atlantis, our first appraisal well has encountered 280feet of net oil pay in a horizon not encountered in the discoverywell, with additional zones yet to be drilled.”

Olver said that BP now has the rights to 3.5 billion BOE in thearea, with 500 million added in the past year. The purchase of 18%of Vastar would make BP the largest leaseholder in the Gulf, with20% acreage licensed, he said.

Browne said that BP is a participant in “nearly all of thesignificant, accessible oil and gas provinces of the world,” andexpressed confidence in the company’s future earnings.

“The result, I believe, is that we can look forward withconfidence to underlying growth in earnings of at least 10% a year,on constant assumptions which don’t rely on exceptional prices ormargin.”

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