What's going on with BP?
I finally got to glance through BP’s financial results that were released last week. Hey, I’m not the one making the big bucks and having to run a huge company. And never will be. But sometimes I wonder what’s in the water in the executive lounges at some places.
Turn to the way-back machine: In 1990/91 I’m working for an oil and gas company. The first Gulf War starts and spot oil prices skyrocket. The company I worked for decided not to sell all of their production, willing to bet that the prices would go even higher. So they inventory some of their production, then watch spot prices quickly decline. While they didn’t lose money, they watched a lot of potential profit disappear because they were willing to look a gift horse in the mouth and tell him “no thanks.” It was relatively clear at the outset that this was going to be a short-term phenomenon in the marketplace and the executives clearly misread all the signals.
Come forward to last year, with exactly the opposite situation: BP decides that oil trading around $60 a barrel is an anomaly. They make decisions based on their financial models which has oil around $40 a barrel. No, I didn’t I mistype that. And according to one public relations person, they confided that their models were really using $25 a barrel. Eh, so what does a few orders of magnitude matter? Well, it might matter when you decide where to invest the company’s money.
Over the past year BP has spent $10.3 billion in their stock buyback program. Which is close to what they spent on capital projects last year. Am I missing something? If you think your stock price is undervalued, by all means buy it back. But on the brink of a historical shift in petroleum prices, with the opportunity to cement high returns for the next decade with today’s projects, BP decided to say “no thanks.”
After watching their ads and seeing them distance themselves from petroleum, maybe they need to change the company name to “Buyback Program.” And hire more public relations people to explain to shareholders why they spent money on propping up the share price instead of cementing a successful future.
Turn to the way-back machine: In 1990/91 I’m working for an oil and gas company. The first Gulf War starts and spot oil prices skyrocket. The company I worked for decided not to sell all of their production, willing to bet that the prices would go even higher. So they inventory some of their production, then watch spot prices quickly decline. While they didn’t lose money, they watched a lot of potential profit disappear because they were willing to look a gift horse in the mouth and tell him “no thanks.” It was relatively clear at the outset that this was going to be a short-term phenomenon in the marketplace and the executives clearly misread all the signals.
Come forward to last year, with exactly the opposite situation: BP decides that oil trading around $60 a barrel is an anomaly. They make decisions based on their financial models which has oil around $40 a barrel. No, I didn’t I mistype that. And according to one public relations person, they confided that their models were really using $25 a barrel. Eh, so what does a few orders of magnitude matter? Well, it might matter when you decide where to invest the company’s money.
Over the past year BP has spent $10.3 billion in their stock buyback program. Which is close to what they spent on capital projects last year. Am I missing something? If you think your stock price is undervalued, by all means buy it back. But on the brink of a historical shift in petroleum prices, with the opportunity to cement high returns for the next decade with today’s projects, BP decided to say “no thanks.”
After watching their ads and seeing them distance themselves from petroleum, maybe they need to change the company name to “Buyback Program.” And hire more public relations people to explain to shareholders why they spent money on propping up the share price instead of cementing a successful future.
posted by Dwight at
11:06 AM
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