In the autumn of 2002, just as Tony Hayward was preparing to become head of BP’s exploration and production division, he learned perhaps the most valuable lesson of his career – never promise the impossible.
Lord Browne, the man Mr Hayward would eventually succeed as chief executive, had pledged production targets that BP had no chance of meeting. But within the space of a few weeks of intense pressure on his deputies, including Mr Hayward, Lord Browne was forced to reduce his growth goals, not once, but three times.
Mr Hayward, who took over a badly bruised BP from Lord Browne nearly two years ago, has deliberately set the bar low as he has gone about turning the company into a more efficient and simpler organisation.
As he embarked on ‘re-inventing’ BP, he told staff in Houston in 2007 that BP’s operational performance was “dreadful”. Even as things began to look up a year later when surging oil prices helped oil companies reap record profits, Mr Hayward warned employees they were moving too slowly in changing BP’s culture.
Both his efforts in turning round BP and in nurturing low expectations outside the company have paid off.
BP revealed substantially better third-quarter results on Tuesday than analysts had expected.
Investors brushed aside news that plunging oil prices had cut BP’s replacement cost profit – a measure widely used in the industry because it strips out the effects of changes in the value of inventories due to price fluctuations – by half from the year before. Instead they drove BP’s shares up nearly 5 per cent because the $5bn profit announced was 40 to 50 per cent ahead of expectations.
The good news did not stop there. Mr Hayward also announced that the company would save $4bn in costs this year. Initially, he had promised cost-savings of $2bn, surprising analysts with a revised pledge of $3bn three months ago.
Mr Hayward said the results demonstrated real operational momentum across the company. “We continue to transform our cost base and grow upstream production volumes. They show that even in the tough conditions that prevail in many of our markets, we can continue to deliver on our promise to invest in future growth while meeting our commitments to shareholders today,” he said.
About 60 per cent of the cost-savings came from optimising operations and cutting more jobs than had been announced. Instead of reducing its headcount by 5,000, BP has shed closer to 6,500 jobs over the past 18 months. The remaining cost benefits have come from favourable foreign exchange movements and cheaper energy bills for BP itself.
Increased oil and gas volumes were also an important part of BP’s positive results.
Output grew 7 per cent from the third quarter of 2008, an unexpectedly impressive increase. That was partly due to mother nature as this year’s hurricane season in the Gulf of Mexico was far milder than last year’s. But even without the weather effect, the company’s production rose 4 per cent, mainly thanks to fields such as Thunderhorse in the Gulf of Mexico, which is now finally running after severe delays.
Those achievements are likely to outshine those of BP’s peers, such as Royal Dutch Shell, the Anglo-Dutch energy group, which announces results on Wednesday, says Gordon Gray, analyst at Collins Stewart.
But there is a downside to good results. They raise expectations for next quarter. And analysts warn that repeating such a pleasant surprise in January might be tough.
Mr Gray believes that production growth for the fourth quarter will only be 1 per cent.
Meanwhile, Citigroup analysts warned that momentum was likely to slow as “the operational turnaround, which commenced in late-2007 has been largely delivered. The pace of year-on-year production growth is now expected to slow ... and much of the plan to reduce organisational complexity is fulfilled.”
Mr Hayward believes he has now caught up with Royal Dutch Shell, his closest European rival.
But privately he admits – as do many of his competitors – that ExxonMobil of the US is the company to match in terms of operational performance.
The Dallas-based group may be struggling to increase its production, but it is widely seen as the industry’s most tightly run ship, regularly outdoing its peers in terms of return on average capital employed – another key industry measure.
It will take a while before BP graduates from pledging that its dividend is safe, as it did yesterday, to being able to match Exxon’s record.
Exxon generally refuses to make promises. But the bar could not be set much higher than having a record of increasing dividends each year for the past 27 years.