Admitting that the company’s “investment phase” has slowed earnings growth for the past 18 months, BP Amoco Plc’s CEO Sir John Browne last week predicted investors will see a 10%/year return on investment for the next three years, fueled by a 13% increase in capital spending, slashed costs and increased productivity.

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

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

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

Browne, who said the company was ready to “move from a phase of retrenchment to a phase of expansion,” said his management team has determined that in the next three years, capital spending, not including new acquisitions, will be accompanied by a continuing focus on unit costs, and improved productivity from its existing assets.

BP’s capital spending will be $13.5 billion a year for the next three years. The energy giant will match the capital spending with asset sales of at least $1.5 billion a year to improve its portfolio.

“This means our total net investment will average around $12 billion per annum, so capital employed should grow by around 4% to 6% a year,” Browne said. “Add to that improved productivity of between 4% and 8% a year, which we believe we can achieve across the group, and we can see bottom-line growth of 10% a year and possibly more.”

Overall, BP plans to direct $8 billion a year of its spending toward oil and gas investments. Most of the spending will be in natural 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 $5.8 billion by the end of 2001, which will net $4.7 billion in savings by the end of this year, said Browne.

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

In fact, last Monday (July 10) BP announced it will purchase Idaho’s IGI Resources Inc. IGI sells gas and power to mostly industrial energy customers in the Northwest, and has sales of 600 MMcf/d of natural gas. It also manages pipeline and storage capacity.

More expensive acquisitions have already been completed, including Amoco Corp., Atlantic Richfield Co. (Arco) and Burmah Castrol Plc (see NGI, Aug. 24, 1998; April 5, 1999). The most promising projects for the future at BP are oil and natural gas discoveries in Trinidad and in the deep waters of the Gulf of Mexico. Appraisal wells currently drilling in the Crazy Horse 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 exciting multiple zones, some not seen in the original discovery well,” said Olver. “In Atlantis, our first appraisal well has encountered 280 feet of net oil pay in a horizon not encountered in the discovery well, with additional zones yet to be drilled.”

Olver said that BP now has the rights to 3.5 billion BOE in the area, with 500 million added in the past year. The purchase of 18% of Vastar would make BP the largest leaseholder in the Gulf, with 20% acreage licensed, he said.

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

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

Carolyn Davis, Houston

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