BP: Catching Up to ExxonMobil?

The British energy major has fields on tap; it's boosting refining and cutting costs. But it has miles to go to beat the U.S. giant's profits

by Stanley Reed

Tony Hayward, the new chief executive of energy giant BP (BP), has a long way to go if he's going to come anywhere close to the financial performance of top rival ExxonMobil (XOM). That was clear from BP's results for 2007, which Hayward announced at BP's London headquarters on Feb. 5. The company's net profit from continuing operations for the year was $21.2 billion, a 5% decline from 2006. ExxonMobil, by contrast, had net income in 2007 of $40.6 billion, up 3%.

Still, Hayward is upbeat, probably because he thinks he can improve BP's results fairly easily. If the new CEO can fix BP's U.S. refining and marketing operations and get the huge, but delayed, Thunderhorse deep-water oil and gas drilling platform in the Gulf of Mexico on stream, there is considerable upside potential for BP—though maybe not enough to close the gap with ExxonMobil. One sign of his optimism: Hayward is hiking the dividend 31%, to 13.525 cents per share, though he says share buybacks likely will decrease. BP shares climbed as much as 3.5% in London trading on Feb. 5 before settling down nearly unchanged.

Hayward says he is confident oil will stay in the $60 per barrel range or even higher for the next few years. That marks a big change from his predecessor John Browne, who until late in his career (BusinessWeek.com, 5/1/07) seemed to assume that $20 per barrel prices could be just around the corner, as they were in his early days as CEO.

Competing With Exxon's Relentless Discipline

BP is one of the few energy majors that manages to replace the amounts of oil and gas it extracts with new finds, thanks to commensurate amounts of new exploration and production. Indeed, the company is at heart an exploration and production (E&P) specialist, more successful than most others at maintaining or increasing its output. Some industry observers even think BP should dump its lackluster refining and marketing businesses and turn itself into a pure E&P company.

Such radical moves may be the only option Hayward and his team—a group of relatively free spirits for the oil industry—have of competing with Exxon's relentless discipline. BP recently announced big discoveries in Azerbaijan, Egypt, and in deep water off Angola, as well as access to Libya and Oman. Last year the company brought nine oil and gas projects online, including the giant Atlantis field in the Gulf of Mexico.

Thanks to Browne, BP also has an edge in so-called renewables: wind, solar, biofuels from microbes, and other alternative energy sources. While it's still hard to pick the winners in this emerging field, BP's broad portfolio eventually should not only garner favorable publicity for the company, but produce some profitable businesses as well.

Hacking Away At Costs

Since becoming CEO last May, Hayward has been working on fixing the most obvious problems (BusinessWeek.com, 7/12/07). He says he will have the Whiting (Ind.) refinery near Chicago at full capacity in the first half of this year, while most of the "economic capability" of the Texas City refinery—scene of a disastrous explosion in 2005—will be restored by mid-2008.

Hayward says he has made progress in reaching "settlements with a number of regulatory authorities and civil claimants, taking a significant step toward resolving many of the legal and regulatory issues" BP faced in the U.S. as a result of Texas City, spills in Alaska, and other problems. The new CEO also is hacking away at costs—promising to ax 5,000 managers and other personnel by mid-2009—for savings of around $1.5 billion. To that end the company is selling the 700 convenience store sites it owns in the U.S., shifting their 9,500 employees to franchisees and other new owners.

Closer Match in Production

The substandard U.S. refining and marketing business is Hayward's biggest problem. Indeed, he termed its performance "unacceptable." In a good year for refining and marketing, BP saw large chunks of its U.S. system sit idle thanks to the aftermath of the Texas City explosion and the problems at Whiting. Iain Conn, BP's new head of refining and marketing, estimates these two refineries alone cost the company $2.5 billion in forgone profits in 2007. BP lost $1.38 billion in refining and marketing in the fourth quarter and made $2.6 billion before interest and tax for the year. By contrast, ExxonMobil had profits of $2.2 billion in the fourth quarter and $9.6 billion for the year from its downstream operations.

The two companies are a much closer match in exploration and production, where BP had profits, before interest and taxes, of $27 billion in 2007, vs. ExxonMobil's $26.4 billion in net income. Production levels were similar, too—3.8 million barrels per day of oil equivalent for BP vs. 4.18 million barrels per day for Exxon—but BP made more per barrel.

Reed is London bureau chief for BusinessWeek .