Bp Amoco Is Cooking With Gas
Poor John Browne. When the chief executive of BP Amoco PLC announced a little more than a year ago that he would buy Atlantic Richfield Co. for $27 billion, all eyes turned toward Alaska and oil. The grand prize was clearly a greater slice of the giant Prudhoe Bay oil discovery that put Arco on the map 30 years ago. Then the feds stepped in. To win the approval of the Federal Trade Commission, Arco had to sell its Alaskan assets to Phillips Petroleum Co. for $7 billion. For many investors and analysts, the April merger of BP Amoco and a scaled-back Arco was an anticlimax. "People think Browne bought an empty house," says Fadel Gheit, an oil analyst at Fahnestock & Co.
Think again. If Browne's new property isn't the castle he first set eyes on, it's certainly no fixer-upper. The Arco acquisition gives BP Amoco huge stakes in some of the biggest natural-gas fields in the world. Combine that with other, less publicized steps to expand operations, and Browne, 52, has effectively transformed Britain's onetime state oil company from an oil-dependent player in two mature provinces, Alaska and Britain's North Sea, into a giant in the global business of natural gas. Gas usage is being driven by a new generation of ultraefficient electric-power plants, replacing coal and nuclear fuels. Arco will boost natural gas to 46% of BP Amoco's total energy reserves--more than double what it was four years ago--and make the company the biggest producer of gas in North America. "There were five things I was looking for in Arco, and Alaska was only one of them," says Browne.
So far, investors don't share his vision. BP Amoco's American depositary receipts are trading around 52--down from a 52-week high of 62 in December, and 9% above the price of April, 1999, when the deal was announced. So far this year, the stock is down 12%, compared with a 3% drop for Exxon Mobil Corp. and the overall oil industry. Thanks to strong oil prices, BP Amoco's net income should still grow about 77% in 2000, to $10.6 billion, says Fahnestock's Gheit, on 20% higher revenues of $100 billion. But earnings would have been 15% higher if Arco hadn't added $17 billion of goodwill, says analyst L. Bruce Lanni at CIBC World Markets.
Once Browne works out the kinks of consolidation, however, the shift to natural gas--and his move into key Asian markets--could look smart. Companies with greater proportions of natural-gas production are churning out higher returns. Royal Dutch/Shell Group, for instance, drew 38% of its 1999 production from natural gas and returned 12% on capital. Chevron Corp., with 28% of production from gas, returned 10%. "Browne didn't get exactly what he wanted [in Arco], but I think he'll be a winner anyway, because BP comes out of this more diversified and more global in scope," says Roger Mortimer, manager of AIM Global Natural Resources fund, which owns 15,000 BP Amoco shares.
For years, natural gas has played second fiddle to oil. While oil can be easily pumped into a tanker and shipped around the world, natural gas costs more to transport. It usually trades at a discount to crude and in parts of the world is still burned off or injected back into the ground for lack of a better use.
But with an increasing concern about the environment and volatile oil prices, cleaner-burning natural gas has become the fastest-growing fuel. The U.S. Energy Information Administration predicts that natural-gas usage worldwide will more than double, to 167 trillion cubic feet per year, over the next 20 years. That's twice the growth rate of oil. And as natural-gas demand grows, producers are signing more long-term contracts with governments and utilities. Even as oil prices have slid on news of OPEC production increases, the price of natural gas in the U.S. has risen on tight supplies.
BOLD STEP. If anyone can build the case for a big shift to gas, it is Browne. The diminutive son of a Romanian immigrant mother and a father who was a midlevel BP exec, Browne built his reputation as head of BP's exploration business in the early 1990s, selling off hundreds of smaller fields and focusing on a few core areas such as the North Sea, the Gulf of Mexico, and Alaska. The strategy was imitated by others, but Browne stunned the industry when he gobbled up Amoco in 1998, the same year he was knighted by Queen Elizabeth II. The $57 billion deal set off a chain reaction in which Mobil, Fina, and Elf Aquitaine got swallowed up.
That mammoth merger gave Browne a taste of just how lucrative the natural-gas business can be. Amoco was just ramping up a massive project off the coast of Trinidad and Tobago. Today, BP Amoco's cost of finding natural gas there is just 10 cents per thousand cubic feet, a small fraction of discovery costs elsewhere. A $1.1 billion processing plant on Trinidad freezes the gas into a liquid at -263F and pumps it into tankers heading for Spain and Massachusetts. There, it is turned back into a vapor and sold at market prices of around $3.50 per thousand cubic feet. "I'd be surprised if BP wasn't earning in excess of a 20% return on capital in Trinidad," says Gordon Shearer, chief executive of a Cabot Corp. unit that owns part of the plant and markets BP Amoco's gas in New England.
With the Arco deal, Browne gets a massive opportunity to expand on that strategy--but investors may have to be patient. The purchase includes a 40% stake in Tangguh, a vast new Indonesian field. It contains an estimated 18.3 trillion cubic feet of reserves, larger than the combined natural-gas reserves of Chevron and Texaco Inc. BP Amoco says production will begin in 2005. The company also now owns a quarter of an estimated 10 trillion cubic-foot field in the Gulf of Thailand that should begin production in two years. But developing those fields will cost billions of dollars, and there is no guarantee that new supplies won't undercut prices. "The most attractive parts of the Amoco and the Arco deals are natural-gas projects that won't begin to show cash flow for five years," grumbles Charles M. Ober, manager of the T. Rowe Price New Era Mutual Fund, which still holds 525,000 BP Amoco shares.
ASIA BOUND? Browne has taken other steps recently to emphasize gas. In March, BP Amoco sold its Texas oil fields, owned in a joint venture with Royal Dutch/Shell, for $2.3 billion. And it may make a $1.2 billion offer for the publicly traded shares of Vastar, a natural-gas operation that was majority-owned by Arco. Wall Street is already speculating on other possible targets, including Unocal Corp. and Triton Energy Ltd., both of which have large positions in Asian natural gas. Those companies say they have no immediate plans for mergers.
It makes sense to zero in on Asia, given the region's need for new power generation. In March, BP Amoco paid $580 million for a 2% stake in PetroChina Co., the largest oil-and-gas company in China. The move was controversial. Human-rights activists protested China's record, but Browne says environmental benefits also must be factored in: "There is a lot of room to improve the air quality in cities such as Beijing by shifting from coal to natural gas."
Browne has gone to great lengths to position his company as the most environmentally friendly oil producer. But the Arco deal did little to burnish that image. It drew attention to a new field BP Amoco is developing--in pristine waters off the Alaska coast. Greenpeace demonstrators camped out at the Northstar project earlier this year and visited BP Amoco's U.S. headquarters dressed in polar-bear suits. But from a business standpoint, there's every reason to believe Browne will once again emerge smelling like a rose.