The Guardian: BP shareholders strike oil

Matt Keating

Thursday April 1, 2004

After being ranked the fifth most successful company in the world by the business magazine Forbes Global last week, BP had more good news on Monday. In an upbeat financial statement, the British oil producer's chief executive, Lord Browne, announced plans to return up to £18bn to shareholders over the next three years through share buybacks and increased dividends if the price of oil remains high. And with Opec yesterday announcing that it would go ahead with an output cut of 4%, a high oil price seemed assured.

The Lex column of the Financial Times welcomed BP's announcement. "Lord Browne ... deserves credit for resisting the siren of pricey acquisitions," said Lex, which also argued that the company's share buyback plan was a shrewd move. "While faster dividend growth would more visibly reward shareholders, a buyback makes more sense, given that cash-flow generation is linked to an unpredictable oil price."

Although that price has "remained much stronger" than anyone expected, at above $30 (£16) a barrel, noted Jeremy Warner, the Independent's City editor, "in the past, a high oil price has always been self-correcting." However, Lord Browne's forecast that the price would stay above $20 (£11) a barrel over the next few years seemed "laughably cautious". "The ups and downs of oil prices correspond almost exactly with those of the economic cycle," said Warner. "This time it might be different. For a start, there's the added factor of [soaring demand in] China. What's more, the world economy is no longer as dependent on oil as it was, so the effect of rising prices isn't as great ... For BP everything looks set fair. That's assuming, of course, that the company's multibillion-dollar investment in Russia doesn't suddenly turn bear-shaped."

Oil price is also affected by other factors, said Stephen Kahn in the Daily Express. "Politics and oil go hand-in-hand. You may well think that events in Iraq last year and Libya in 2004 can only be understood through the perspective of oil supply."

Alex Brummer, the City editor of the Daily Mail, explained that strategic uncertainty in the Middle East, strong economic expansion in Asia and a healthy demand in the US was keeping the price of oil well above $20 a barrel. "This in turn is going to deliver huge windfall profits upstream at the production, storage and transport level." BP's promise to share the benefits with shareholders was excellent news for investors in the oil industry after the Anglo-Dutch Shell fiasco, he added.

Shell has been forced to downgrade its oil reserves twice this year. Neil Collins was among those to compare the rivals. "From the tone of their recent announcements, the two companies could be in different industries," said the Daily Telegraph's City editor. "Here is Shell in crisis, the chairman gone, along with 20% of its reserves, while here is BP, piling them on, boasting of 7% annual output growth until at least 2008 with plenty more left in the tank."

The business commentators congratulated Lord Browne for refusing to revel in his company's success. The FT's Observer column said the temptation to "deal a blow" to Shell would have been great: "[But] it seems that at least in some quarters there are those who believe in not kicking a competitor when he's down."

The Times's Patience Wheatcroft agreed that BP's chief executive would never "indulge in anything so undignified as public gloating over others' misfortunes". However, his pledge to share profits with investors underlined "the contrast with Shell in its present predicament. With the oil price at $20 a barrel, BP could grow its dividend but now that it is comfortably over $30, the cash will gush out to shareholders. It can only add to the pressures on Shell to do its own share buyback."

But Brummer reckoned success presented BP with a dilemma. "Lord Browne and his team will face awkward questions when the super profits start to flow through and investors and management benefits while petrol customers face steeper prices at the pumps," he said in the Mail. "It would make good commercial sense for BP to share additional benefits with the customer."

http://www.guardian.co.uk/editor/story/0,12900,1183114,00.html