BP Disaster: Sticking the knife in

Writing the MT Diary in Management Today, a UK magazine, the director of the London School of Economics, Howard Davies, sticks the knife in with some harsh and personal words about BP’s head of communications, a former editor of the Financial Times, Andrew Gowards. Mr Davies writes:

Gowers, you may recall, resigned as editor of the Financial Times at the end of 2005 over ‘strategic differences’ with the board. The differences amounted to the fact that the board wanted the FT to be an authoritative and successful paper, whereas … (it now is once more under Lionel Barber).

Gowers then became head of public relations for Lehman Brothers, required to spin his way through the world’s biggest bankruptcy. Having failed in that task, he wrote a couple of distasteful ‘kiss and tell’ articles in the Sunday Times, which almost made one feel sorry for Dick Fuld. Then he moved on to pastures new and signed up as head of external relations for the new dean of London Business School, Robin Buchanan. Buchanan lasted six months, so Gowers was once again on the market.

You guessed it. He is now running public relations for BP. And it took him little time to work his particular brand of magic. He has become an impeccable leading indicator of disasters ahead. If he turns up next advising the Greek government, you will know what to do.

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Repsol as bellwether

With oil prices down 40% from a year earlier, oil companies’ third-quarter earnings were defined by their relative decline (see Refining woes). In the case of Spain’s oil champion, Repsol YPF, the term plunge was truly justified, especially in its domestic operations.

Repsol refiningThe company’s net income fell 61% (“clean” net income, after accounting and inventory adjustments, was €279m) as oil and natural-gas prices declined and refining margins narrowed, the company said in its statement. Though that was well above what share analysts had, on average, predicted, the virtual disappearance of Repsol’s Spanish refining margins stood out.

Repsol is Spain’s largest refiner, according to the Oil & Gas Journal, and like European peers Total and Eni, its downstream business suffered from slack European markets.  Repsol’s refining margin indicator for Spain (a measurement of the profit from turning crude into fuels) fell nearly 96% year-on-year to just US$0.3/barrel in the third quarter. Repsol has responded by shutting refining units in light of the pitiful margins.

Nonetheless, gains in marketing and sales of liquefied petroleum gas (LPG) helped Repsol’s downstream business exceed expectations — at €106m in the quarter, the year-on-year decline was 79%, about a third less than most forecasters had expected. But there is a big question mark about the sustainability of those earnings, given that it is running significantly below capacity to save on costs.

Repsol’s upstream holds the most promise, although output fell year-on-year. In terms of exploration Repsol performance has excelled — reporting a record 15 discoveries, including important finds off the coast of Brazil, as well as in Venezuela (see Repsol’s risks), the Gulf of Mexico and Sierra Leone.

As Repsol seeks funds to develop these prospects, especially its subsalt prospects off Brazil, selling more of its stake in its Argentine unit YPF remains on the cards but elusive.

However, its Spanish refining exposure will remain a concern as well as its balance sheet — debt and debt costs have been rising and the board of directors will decide in two weeks to decide whether or not to cut its dividend.

Repsol’s outlook was reflected in the range of opinion from the big banks’ analysts. UBS, for example, rated Repsol a “buy” on the grounds that its upside potential in oil & gas exploration and production outweighs the risks in other divisions, whereas Deutsche Bank took the opposite view and cut Repsol to a “sell”. There’s a lot of room between their respective share price targets of €21 and €16. Repsol has rebounded strongly this year from just above €13 a share to above €18 on Friday, though it is still a long way below its mid-2007 high above €30.

The company has many of its own issues, but its uncertain outlook is something of a metaphor for its “second tier” European oil peers.