BP's Profit Ambitions: An Oil Major's Guide to Beating Out Exxon

BP CEO Tony Hayward isn't content merely pulling a colossally messed-up company back from the brink. He wants his super major to be the world's most profitable oil company. That means kicking Exxon -- a company that earned almost $5.5 billion more than BP in 2009 -- out of the top spot.

The upshot? An ambitious plan to increase annual profits by more than $3 billion over the next several years and to expand production as much as two percent a year through 2015.

Hayward already squeezed $4 billion in cost savings from BP last year -- a success that had some analysts wondering whether he could keep up the momentum. But the CEO, who has reduced overhead by more than one-third and cut 7,500 jobs to date, says he's still got a lot more to do, he told investors in his 2010 strategy presentation:

The challenge and the opportunity for us is that while our portfolio ranks amongst the best in the industry, our financial performance has yet to fully reflect this. There is now a real opportunity to make this portfolio work harder for us and we intend to do just that.

BP's plan lacks the drama of mergers and acquisitions, but that's OK. BP doesn't need drama. Instead, the company will focus on the nuts and bolts of its operations. And as mundane as that may sound, there are still some interesting strategies at play.

For one, all of the company's oil and gas projects will now be managed out of a central office in Houston, a move that Hayward called the biggest change to BP's exploration and production operations since the acquisition of Amoco 12 years ago. In the past five years, BP has overspent by about 20 percent on its major projects mainly because of poor project management, Andy Inglis, the company's head of exploration and production, told investors. BP could save more than $700 million a year just by streamlining that management.

BP's strategy includes an increase oil and gas production, where the company has proven it can compete with Exxon; indeed, last year BP surpassed Exxon for the first time in that regard.

BP also plans to increase pretax profits by $2 billion in its refining division, a business segment that is screaming for greater efficiency. Refining has been a loser for almost every integrated oil company as weak demand for fuel and crappy margins made it impossible to make money in 2009.

Hayward isn't expecting the refining industry to improve. His goal is simply to ensure that BP's refining portfolio can break even in an environment similar to 2009. To that end, he will focus on modernizing U.S. refining operations, which have struggled to recover from a Texas City refinery explosion in 2005 that killed 15 people. BP also will sell its marketing business in Namibia, Malawi, Tanzania, Zambia and Botswana. It will remain in South Africa and Mozambique and will continue to explore for oil in Africa. Hayward also plans to improve the way BP buys goods and services from third parties as a way to reduce costs. Analysts and investors like what Hayward accomplished in the past two years, but worried that there didn't seem to be plan to increase profits. Hayward has now answered that criticism. BP will make final investment decisions on 24 new major projects in the next two years including eight in the Gulf of Mexico. Last year only seven new projects came into production. The company also announced a new joint venture with Lewis Energy Group into the U.S. Eagle Ford shale gas play.

Photo of BP CEO Tony Hayward from BP