BP Amoco plc is reviewing its massive portfolio and has set tough performance targets as it integrates two sets of assets following last year`s merger.
On July 15, Chief Executive John Browne briefed financial analysts in London on how the company planned to take $4 billion off annual costs, sell $10 billion worth of assets, and boost capital outlays to a total of $26 billion during 1999-2001 (OGJ, July 19, 1999, Newsletter).
Browne said the targets were intended to help the company increase its return on capital by 6% in the 3 years: "Clearly, absolute profit levels will be determined by actual trading conditions, but this very significant improvement in underlying performance is a target we now believe we can deliver."
Planned disposals include the company`s Canadian oil interests, its 64% stake in Altura Energy (a joint venture with Shell Oil Co.), and a reduction in refining capacity, starting with the sale of the 250,000 b/d Alliance refinery in Plaquemines Parish, La.
Asset disposals
A BP Amoco official told OGJ that the company is currently reviewing all upstream assets, refineries, and chemical plants in its portfolio. However, it is not prepared to release details yet of other assets earmarked for disposal: "We suspect the announcements will come in bits and pieces."
Of the disposals, $4 billion is expected to come from the sale of exploration and production assets, $3 billion will come from refining and marketing, and sales of chemicals assets would bring in $2.5 billion.
"With worldwide refining capacity continuing to grow faster than demand," Browne told analysts, "our expectation is that the global refining margin will average little more than $1/bbl over the medium term.
"Our aim, therefore, is to reduce our refining coverage by around one third, which means that the ratio between our refining supply and the volumes we market will fall to between 60% and 70% from today`s level of 90%."
BP Amoco considers the Alliance refinery superfluous. Refinery Manager Felix Strater said, "The principal reason for the decision to sell is that BP Amoco does not need to own the Alliance refinery to meet its product supply needs.
"The Alliance facility is one of the best sweet-crude refineries in the country and a strong financial performer," said Strater. "Over the past several years, the employeesellipsehave made significant strides in improving safety, environmental performance, and profitability. I am certain that another company will find theellipserefinery is a good investment."
BP Amoco will continue operations at the refinery during the sales process. If an acceptable offer is not received, the company will continue to own and operate the refinery, says Strater.
Browne outlined BP Amoco`s plan for the chemicals sector: "In chemicals, we aim to add value by focusing our manufacturing predominantly on `ideal sites` such as Grangemouth in Scotland, where we can integrate our activities with our own hydrocarbon base and minimize the production of lower value by-products.
"Creating a limited network of manufacturing sites-many integrated with upstream and downstream assets-will reduce fixed and variable costs per metric ton.
"In total, we expect unit costs in our chemicals business to fall by 25% over the 3-year period.
"Our aim," said Browne, "is to have an overall chemicals portfolio biased to products such as polypropylene that which are growing faster than the chemicals sector average and to growing markets such as Korea, Malaysia, and China."
The BP Amoco official said that, besides the Grangemouth site from the original BP portfolio, the former Amoco`s Texas City, Tex., refining and petrochemicals complex was another "advantaged site," combining all the elements of the company`s business at one location: "These two are the classic examples, but some other sites have similar economics."
Merger goals
The integration of BP and Amoco is now essentially complete, Browne says, with synergies from the merger expected to lead to a reduction in combined costs of $2 billion by the end of 1999, a year ahead of schedule.
In the 6 months since the merger closed in December 1998, Browne has set new targets for the first 3 years of the combined company`s operation; these are intended to keep BP Amoco on a strong growth curve into the next century.
His first goal is to improve efficiency by cutting costs and to high-grade the asset portfolio through divestitures.
"Second, we plan to invest for growth," said Browne. "Based on mid-cycle assumptions, we aim to spend some $26 million over the 3 years to the end of 2001, with our capital employed growing in total by 2-5%.
"Third, we aim to maintain our gearing (pecentages of debt to equity) within a band of 25-30% and to maintain our dividend policy of paying out 50% of underlying mid-cycle earnings.
"Fourth, we intend to enhance our returns on capital employed by between 5% at the bottom of the cycle and 6% at mid-cycle, when we would have the additional help of extra volumes."
Browne said that discoveries not yet booked give BP Amoco "sufficient resources available not only to grow production but to continue to replace that growing production for at least the next 10 years." Rationalization of the upstream portfolio is expected to keep production "broadly level" between now and the end of 2001.
"Beyond that," he added, "there is strong growth potential for oil production, particularly from the Gulf of Mexico, from Angola, and from other contributors, including the Caspian. Production could be rising by as much as 8%/year later in the first decade of the next century."
Browne said BP Amoco was planning on the basis of a continued low oil price and would drive down supply costs so the group finances would be robust at $11/bbl. This means cutting $2/bbl out of costs.
"With production of around 1 billion/year of oil, a $2/bbl reduction would mean an improvement of some $2 billion. In contrast to downstream cost reductions, which are partially `competed away,` upstream cost reductions tend to go straight to the bottom line."
BP Amoco expects capital spending for 1999 to amount to $7 billion and disposals to bring in $2 billion. The upstream sector is expected to contribute $2.2 billion to the cost reduction over the 1999-2001 period, with $1.4 billion coming from refining and marketing and $400 million from petrochemicals.
The planned cost reductions and asset disposals do not include any gains BP Amoco will make if it takes over ARCO later this year, as anticipated: "While ARCO will represent (about) 15% of the total market capitalization of BP Amoco, it will strengthen the portfolio, particularly in gas and the U.S. downstream. It will also give us new opportunities in Alaska and further potential for future growth in Asia."
BP Amoco and ARCO have scheduled shareholder meetings at which the proposed takeover is expected to be approved. ARCO shareholders will vote in Los Angeles on Aug. 30, while BP Amoco shareholders will vote in London on Sept. 1.
