BP Plc Chief Executive Officer Tony Hayward outlined plans to boost production and cut refinery costs as he tries to close the gap with Exxon Mobil Corp., the world's most profitable oil and gas company.
BP said Tuesday it can increase production as much as 2 percent a year through 2015 as the share of natural gas in total output rises to 45 percent from 40 percent. It aims to improve underlying profitability in its refining business by $2 billion over two to three years, Hayward told investors and analysts during the company's annual strategy briefing.
“It's not going to be easy, but their plan is credible,” said Jason Kenney, head of oil and gas research at ING Commercial Banking in Edinburgh. “They'll be at least as good as Exxon in terms of return on capital employed over the next five or six years. That's a major turnaround from the dark days of 2005 and 2006. They're firing on all cylinders, but they've not yet pressed the accelerator.”
BP's oil and gas production passed Exxon's for the first time last year even as the U.S. producer earned more than $4 billion above its London-based rival. Hayward said his company has larger, more complex refineries than its peers, allowing it to wring extra cash from its plants as fuel-processing profits for the industry remain depressed.
BP's market capitalization was about half of Exxon Tuesday even after BP's 22 percent gain since the middle of last year, compared with a 7 percent drop for Exxon. BP trades at a price-earnings ratio of about 10, while Exxon's multiple is more than 16.
BP fell as much as 4 pence, or 0.7 percent, to 596.2 pence in London trading today.
“Our direction is clear, it is the unrelenting pursuit of competitive leadership in relation to cash costs, capital efficiency and margin quality,” Hayward said during the presentation in London. “We believe we've made a good start, but it's only a start.”
BP's underlying net income, a measure that excludes one- time items, was $14.6 billion last year, BP said. That compares with an annual profit at Exxon of $19.3 billion. ING's Kenny said BP may overtake Exxon in return on capital in about 2013.
In exploration and production, project management will be centralized in Houston in the biggest shakeup since the merger with Amoco Corp. in 1998, said Andy Inglis, who heads BP's upstream business. The company can save as much as $700 million a year in project management and $500 million a year by improving the efficiency of drilling operations, he said.
BP's average daily oil and gas production rose to 3.998 million barrels last year. Exxon's average production fell to 3.933 million barrels a day from 4.237 million barrels a day in 2006.
Last year, Hayward cut the company's cost by about $4 billion, double BP's target at the start of 2009.
Iain Conn, head of refining and marketing at BP, said that the company has closed the performance gap against rivals since 2007. The company will press ahead with a modernization program at its refineries, with the upgrade at its Whiting refinery in Indiana being the largest undertaking, Conn said. BP expects refining costs to return to 2004 levels.
“Exxon is the natural target now because Shell has slipped behind,” said Peter Hitchens, an analyst at Panmure Gordon & Co. in London. “Exxon has a fabulous refining business, and given its scale, there's no way BP can catch them up in gross profits. But they can catch them with return on capital, and they already have with production.”
BP has sold refineries, giving it less exposure to the sector than European rivals Royal Dutch Shell Plc and Total SA. BP's refining capacity is about equal to its crude oil production, while the other two companies are able to process twice their daily oil output.
The company's projected production increases don't include Iraq, where BP has agreed to help raise production at the Rumaila field in partnership with China National Petroleum Corp. It could become the second-largest producing field in the world by 2015, Inglis said Tuesday.
