View from City Road: Sharp lesson for profligate BP

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The Independent Online
BIG companies are supposed to attract top notch managements to match their eminent status. But British Petroleum's half-time report bears the hallmarks of a premier league company with a third division executive team.

Underlying net results, after excluding oil stock values, have crashed from an pounds 834m profit to a pounds 717m net loss. The dividend has been slashed by half and more than pounds 1bn is being written-off in redundancy costs and asset write-downs. The business is bleeding cash by more than pounds 1bn a year and its debts are expected to run up to 90 per cent of net assets this year.

Not all the blame for these results can be put on Robert Horton, who was ousted as chairman and chief executive in a boardroom coup last month. Lord Ashburton and David Simon, who have since taken over as chairman and chief executive respectively, admitted as much yesterday.

The results reflect a failed strategy which they were happy to endorse for several years.

The group was not only spendthrift with acquisitions through the 1980s and profligate with its capital expenditure, but also deeply overstaffed.

It was also over-confident about the oil price and slow to respond to a prolonged recession. Much of the diversification into minerals and nutrition in the past decade has had to be reversed.

Belatedly, the company is beginning to react to its problems. Costs are being slashed to improve margins, disposals are being accelerated and the dividend has been cut to a more sustainable level to repair the balance sheet. But it is still unclear whether the measures - though sensible - will be enough.

BP is not unique in trying to restore margins. Nearly all its big rivals are doing the same and BP may be unable to establish any lasting cost advantage.

Despite accepting the need for a controlled withdrawal from some areas, it remains too committed to the rump of its chemicals business. Although strong in some areas, BP is a peripheral player in world chemicals and may lack the muscle to withstand a fundamental rationalisation of the industry expected by many.

Its programme to cut debts will be slow. BP plans to pay off dollars 1bn from its borrowings annually. In effect, over half is coming from shareholders in the form of the slashed dividend. It will be a long haul before BP returns to form. It is too early to buy the shares.

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