When a leader actually leads, he or she should be rewarded. An example of real leadership might be Tony Hayward, CEO of BP plc (BP). While BP had a fairly tough 2009, posting lower numbers than the previous year, its payouts to shareholders actually rose. It’s worth recalling that oil prices in first half of 2008 were stratospheric, contributing more to every oil company’s profits than might have otherwise been the case.
As a reward for his 2009 performance, Hayward got a 41% pay boost, including $6 million in cash and stock. What did he do to earn that?
BP reduced its operating costs by $4 billion in 2009. That, in itself, could justify Hayward’s paycheck.
The company also increased production by 4% to 4 million barrels/day of oil equivalent. And as production increased, so did BP’s reserves replacement ratio. The company replaced more than 120% of production in 2009, providing the BP with a solid base for future operations.
And while Hayward has kept his eye on business both today and in the near-term, his moves to strengthen BP for the longer term are really why he’s worth the money. To all appearances, he’s a guy who evaluated what was on the table, made a choice, and now plans to execute that choice.
While the BP of old (three years ago, before Hayward took over) was casting around for a strategy to take the company “Beyond Petroleum”, Hayward has committed BP to a hydrocarbon strategy for at least the next 20 years.
This may seem non-intuitive, what with all the furor over solar, wind, geothermal, and algae. But BP now recognizes that there will be no replacement for hydrocarbons until at least 2030, and maybe far beyond that. Demand for energy is expected to increase by more than 40% by then, and there is no way that anything other than oil and natural gas will play the lead role in supplying that energy.
The single largest move BP made last year was to partner with China National Petroleum Corporation to develop Iraq’s Rumaila field. Combined with other upstream operational improvements on fields it already works, BP could as much as 2 million barrels a day to its current production.
BP has also boosted its stake in natural gas production, starting in 2008 with its $1.1 billion purchase of a piece of the action in Chesapeake Energy‘s (CHK) Fayetteville shale play. Just a few weeks ago BP announced a partnership with Lewis Energy which gives the British company a 50% stake in an 80,000-acre Eagle Ford shale play. Hayward has said that he wants to increase BP’s gas revenue from 40% to 45% of the company’s total revenue.
It is possible of course to argue with Hayward’s and BP’s hydrocarbon-first strategy. But from a shareholder’s point of view, it’s the only realistic position to take for the next 20-25 years. Exxon Mobil‘s (XOM) deal to buy XTO Energy (XTO) for about $40 billion puts an exclamation point on that story.
However, the argument could get particularly heated when taking into account BP’s estimate that there are 200 billion barrels of oil under the Arctic Ocean. Getting those barrels out will take a long investment over many years with technology that probably hasn’t been invented yet. But BP can expect a lot of pushback from environmentalists, and even governments trying to enforce environmental regulations.
By that time, though, Tony Hayward will have retired and it will be someone else’s problem. For now, Hayward has set a course for the company to follow for a long time. It’s a prudent course and is very likely to be the right course. For that, he deserves what he makes.
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