BP Amoco looks to slash costs further and plans $10 billion assets sale

Before BP Amoco plc was formed last year by merger, BP was just about the leanest and meanest petroleum company, and this was reflected in BP`s high share price in comparison with rivals.

The takeover deal was seen by BP as a means of getting its hands on an attractive set of assets, which were not performing as wells as it own, and turning the screw on them by means of BP-style asset management.

In the latest step of this process, BP Amoco Chief Executive John Browne briefed financial analysts in London on July 15, telling them how the company planned to lop $4 billion off annual costs, sell $10 billion worth of assets, and boost capital outlay to a total of $26 billion over the period 1999-2001.

Browne said that these 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.

The integration of BP and Amoco was now essentially complete, Browne explained, 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 and his strategic planners have set new targets for the first 3 years of the combined company`s operation, which are intended to keep BP Amoco on a strong growth curve into the next century.

"First," said Browne, "we will continue to improve the efficiency of our operations, with a target to cut our costs by some $4 billion by the end of 2001, a reduction of more than 20% from our 1998 base. We also intend to high-grade the portfolio with $10 billion of disposals.

"Second, we plan to invest for growth. 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 within a band of about 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 gave 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% a 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.

"Since 1989," said Browne, "we`ve reduced our supply costs by 5% a year in real terms. Our objective is now to reduce those costs by a further $2/bbl by the end of 2001, bringing Amoco costs down to the BP level but also continuing to reduce the BP level itself.

"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.

Planned disposals include the company`s Canadian oil interests, its 64% stake in Altura Energy, and a reduction in refining capacity starting with sale of the 250,000 b/d Alliance refinery in Louisiana.

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 disposals, and sales of chemicals assets would bring in $2.5 billion.

"With worldwide refining capacity continuing to grow faster than demand," said Browne, "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%.

"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 tonne. In total we expect unit costs in our chemicals business to fall by 25% over the 3-year period.

"Our aim is to have an overall chemicals portfolio biased to products such as polypropylene, which are growing faster than the chemicals sector average, and to growing markets such as Korea, Malaysia, and China."

The planned cost reductions and asset disposals do not include any which BP Amoco will gain when it takes over Atlantic Richfield Co. this year as anticipated: "While ARCO will represent on 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."

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