Uphill battles for oil darling BP Amoco

By Andrew Mitchell

LONDON (Reuters): Forced into court to save its U.S. merger with Arco, oil giant BP Amoco is now fighting on several fronts to defend a gilt-edged reputation.

U.S. antitrust legislators the Federal Trade Commission (FTC) on Wednesday delivered the latest blow to the oil sector's long- time golden boy, voting to sue in a California court to stop BP Amoco's US$27 billion Arco purchase.

It highlights the need for the Anglo-American giant to forge a new strategy now both U.S. and European trustbusters have made it clear that the oil industry supermajors have got big enough, analysts said.

"Once the Amoco merger has been completed, it is difficult to see how BP Amoco can repeat the trick of merging using its highly rated paper in an effort further to drive down costs," said Dresdner Kleinwort Benson in a research note.

"Management may have to contemplate a return to an explicit growth strategy -- something which was attempted in the 1996-1997 period with mixed results."

So far the investment community is keeping faith with BP Amoco's acclaimed management team, saying the Arco rejection became more a matter of bad luck rather than bad judgment.

Oil's jump to nine year price highs has made the U.S particularly sensitive to fears that BP Amoco could have a stranglehold on supplies to the U.S. West Coast.

"The market was naive about the politics, and the extent to which the Arco deal would become embroiled with U.S. worries over higher gasoline prices in an election year," said Jon Wright of Merrill Lynch.

Yet from deep-seated problems on BP Amoco's investment in Russia's Sidanko to a patchy record on the reopening of low-cost Middle East oil provinces, there have been signs that for the moment the Anglo-American giant has lost its magic touch.

"The management credibility has got to be taken down a peg or two," said Peter Hitchens of Willams de Broe. "(Chief executive) John Browne walked on water when this deal was announced."

BP Amoco's sheer size meant that losing Arco or Sidanko would not hurt it too badly, while most of the damage to its share price from losing the Arco deal has already been done, the analysts said.

"You have to remember the scale of changes BP management is trying to deliver," said JJ Traynor of Deutsche Bank. "They've done two big mergers -- one with Amoco they got through in record time. Arco is taking a bit longer."

Analysts think BP Amoco should not be faulted for its ambition even though some have accused the company of hubristic blunders in overlooking potential FTC objections.

"Their rate of change is challenging the industry. It's not BP Amoco that should be doing less but the rest of them that should be doing more," said Traynor.

BP Amoco has been slow out of the blocks in the Middle East -- seen by most experts as the key for oil company growth in coming years as huge, cheap reserves reopen to foreign investment.

In Saudi Arabia it has lagged main industry rivals ExxonMobil and Royal Dutch/Shell in pitching for new projects. While well- placed in Kuwait it was challenged this week by a lawsuit from UK's Lasmo that it illegally tried to form a new bid consortium.

And increased exposure to political sensitivities in the U.S. could slow still further any move into Iran's lucrative upstream where Shell has just landed its first deal.

"What's happened with Arco will slow down BP's Iranian ambitions considerably. They might have to look for a different approach," said one Tehran source.

Some argue that BP Amoco's lack of downstream muscle compared to Shell and Exxon may mean it will suffer more when the crude oil price starts to fall from current nine-year peaks. "Shell is a better defensive play," said one analyst.

Arco worries mean BP Amoco stock already underperformed sector leaders by over 10 percent in the early part of this year after bettering rivals by that amount for much of last year.

The whole oil sector will have to wait until an end-March meeting of the OPEC cartel for clearer signals on what crude price they will be dealing with for the rest of the year.

A wait of up to five months for an Arco ruling will be another millstone around BP Amoco's neck.

"If John Browne takes on the U.S. and wins, BP management's premium will be back with a vengeance," said Merrill Lynch's Wright. "If he loses then his crown will have slipped."

While analysts believe BP Amoco has a strong case, luck could again prove crucial if it is to win back the all-conquering aura it carried just a few months ago.

"There are precedents where the FTC has lost in court, but none has ever been of this size," said Dresdner Kleinwort Benson. "In essence, the decision may simply come down to the political leanings of the judge in question."