Former British Petroleum CEO John Browne managed the company’s finances as group treasurer near the end of the oil crash in the 1980s.
In an interview with Goldman Sachs, he explained why the current oil price crash does not necessarily mean that company returns will drop.
“Perhaps surprisingly, I do not see a meaningful impact of oil prices declines on industry returns because industry costs tend to move commensurately with the price of oil,” Browne told Goldman in a note published Monday.
Oil companies have been slashing production, reducing capex forecasts and laying off tens of thousands of workers to reduce costs as crude prices fall.
And here’s why Browne says all these measures are actually good for business. Even though higher prices help oil companies build spare capacity, they also introduce extra costs and practices that aren’t always most efficient. When revenues drop with prices, companies shed off inefficiencies and extra costs because there is less cash to spend.
He added that when oil prices increased in the last few years, returns also increased. But when prices settled around $US100 per barrel, industry returns faltered because the cost of production also increased.
“A reduction in capital expenditure will leave supply and demand in better kilter as time goes by, and the industry will be stronger as a result,” Browne said.
His strategy to protect BP’s finances in the ’80s was to raise money by issuing lots of bonds. He also arranged $US6 billion in emergency credit lines from banks.
This time, he says large oil companies with big balance sheets may acquire mid-sized companies that don’t have the revenues to continue growing on their own. However, they will stay away from small companies with huge amounts of debt because it would take a lot more effort to acquire them.
Browne worked at BP for 41 years before resigning as CEO in 2007.
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