There’s a downside to being a top energy marketer — everyone wants to hire your employees. BP plc CEO Tony Hayward said last week the company has lost its fair share of energy traders to investment banks in recent months, but the company will not overpay to retain talent.
Presiding over his first conference call as the company’s new CEO, Hayward said that “in terms of losing people, there’s no doubt that we’ve lost a few more people than we would have ideally wanted to this go-round.” In the first half of the year, several of BP’s top marketers apparently jumped ship for the emerging energy units at investment banks.
“Today it’s a very hot market for good traders,” said Hayward. “It’s simply a case that we’ve seen moving into this area a large number of investment banks. We don’t like to lose people, but we’re not going to pay silly sums of money to retain people.”
Iain Conn, BP refining and marketing chief, said, “We lose traders, we recruit traders. This happens all of the time. Obviously, we are very experienced in the physical markets, and some of the attraction of people who we lost in the last quarter or so were part of that. But we have a deep bench of strength on the team, and nothing is occurring to reshape the way we manage our business.”
Clearly, BP has operational problems that will take priority, said Hayward. The company is not likely to see an uptick in its oil and natural gas output before 2008 because of refinery problems in the United States and maintenance delays that included the shut-in of the Prudhoe Bay operations following a leak. Since Hayward took the reins in May, the management team has been reviewing all of the oil major’s worldwide operations to improve performance, safety and overhead costs.
BP will not be “engaging in wholesale restructuring,” Hayward told analysts. “We will be looking where to build capabilities, and we want to ensure we don’t have duplication. We will be looking at how we can hold functional capability and at what level that should be held at. But there will be no wholesale changes. No doubt we have duplication and overlap, which we are going to go and sort out.”
Paramount will be a renewed effort to “invest in capability in terms of our people, to increase our openness and transparency and to restore our pride and confidence,” he said.
“We have no cost cutting targets at all, but we want to see if we can reduce some of the complexity of the group to allow us to focus on operations,” said Andy Inglis, chief of BP’s exploration and production unit. “We still see pressure on the upstream,” in terms of cash flow, but there is “greater buying power in the areas in which we operate in North America…etc., on the operations side. We are clearly seeing wage inflation coming through. It is sustaining, and it is a real issue in our high-priced world today. Driving cost efficiency is as big an issue as we have.”
As the company goes into 2008, BP is expected to have “significant new sources of revenues, which will help with cash flow,” Hayward told analysts. Several international ventures are slated to begin soon. In the United States, the San Juan Basin project has been sanctioned, and in the deepwater Gulf of Mexico, the Atlantis project will ramp up by the end of this year; Thunder Horse is scheduled to finally become operational in 2008.
However, the CEO acknowledged that investors will have to take a wait-and-see approach on how well the company turns the corner in the second half of the year.
BP’s 2Q2007 clean replacement cost profit, which excludes exceptional items and inventory changes, was off almost 13% from a year earlier, falling to $5.35 billion from $6.1 billion in 2Q2006. As proof of its production and processing difficulties, net cash fell sharply to $6.1 billion from $9.1 billion. Including exceptional items, BP eked out a 1.5% net profit of $7.38 billion (38.2 cents/share) in the quarter, compared with $7.27 billion (35.6 cents) a year earlier.
In the United States, BP’s natural gas production fell from a year ago to 2.165 Bcf/d from 2.49 Bcf/d. Total worldwide gas production also was down from a year ago to 7.86 Bcf/d from 8.62 Bcf/d. Worldwide, oil and gas production was off 5%, reaching 3.8 billion boe/d, compared with 4.02 boe/d in 2Q2006. Adjusting for asset sales and changes in its production agreements, production declined by 1%. Full-year production is expected to range 3.8-3.9 MMboe/d, which is in line with previous guidance.
Hayward reflected on how oil and gas prices would influence BP’s strategic thinking going forward.
“We all believe [oil prices] are robust for the short and medium term,” said Hayward, “but I clearly can’t articulate exactly what is the ‘medium term.’ This is being driven by very strong demand, and until that demand diminishes, prices will be pretty robust. Longer term, it’s much tricker to call. If you look to history, it reflects that. Industry has always called it wrong. We will remain quite thoughtful about what makes sense along the way. This is a long-run business. Very few investments that we make remunerate themselves within a 10- 15-year time period…”
BP is seeing “demand pattern shifts in the U.S. over the next three to four years, as the country and the people appear to get very serious about climate change. We haven’t been very precise,” but Hayward said change in demand will lead to a shift in what BP does in the long term. BP is one of the top renewable energy companies in the United States, and that business is expected to continue to grow. It also is expanding its growing solar and wind business units and its investments in hydrogen energy.
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