ECONOMICS AND TIE CITY
Lessons from Burmah Oil ...
Nicholas Davenport.
When the crunch comes as it must do over the next few months — that IS, the grinding of the policy teeth of the right and left of the Labour Party over the question of wages, inflation and employment — our political commentator may be right in forecasting that the Labour Party will hold. But as it has never been a party but always an uneasy coalition I presume he means that a Labour coalition will hold. I do not disagree but in my opinion it will lurch to the centre and hold on the' right. The recent speeches of the Chancellor and the Prime Minister give that impression, especially that of Mr Wilson in which he said that public money will not be committed to nationalise corn panies that get into trouble through irresponsible strikes. Let them go under and let unemployment rise, he might have added. I believe the Whiff of this grape-shot in the coming political battle was smelt in the Stock Exchange and caused a rally in the bear market.
I see that Professor Vaizey — in the Evening Standard — says dramatically that a struggle is now going on for the soul of Chancellor Healey. Who denies that he has a soul? He has, according to the
professor, two choices. Choice one wait and see — flood of big wage rises — prices rocket as hyper-in
flation takes hold — more companies, including banks, go bankrupt—and large scale unem ployment — £ sterling, already at the mercy of sheikhs, collapses When Arabs withdraw their sup Port. Choice two — swift action to balance the budget — government spending cut and swingeing taxes imposed — imports halted (Spectator's import controls Policy?) — massive unemployment initially but, living within our means, overseas cash flows in, confidence builds up and growth returns. This terrible choice may be an over-dramatisation. I cannot see the budget being balanced next April when the borrowing requirernent is now over £6,000 million. But the City feels that the Chancellor will be driven into a choice tWO policy, if somewhat moderated to avoid driving the left wing out of the Labour Party. The answer the left has made to Mr Wilson's rightist speech is that he should not put the blame on Striking workers when it is the fault
of bad management. Now governments have had to take over or bale out companies which are of national economic importance —
Rolls-Royce, shipbuilders, machine tools, computers, etc. — but Mr Wilson has recently made it clear to his left that he is not prepared to take over companies just because Mr Benn wants him to do so or to bale out companies just because bad management or strikes get them into trouble. This last point has been brought home to the left by the trouble at Burmah Oil whose rescue has been confined strictly to a Bank of England operation. No nationalisation nonsense.
The Burmah Oil story is worth telling because it has lessons for all of us on both sides of politics. As an investor I have never cared much for the company and have often attacked its setup and its management in these columns. It has aptly been described as an investment trust which had got out of control. It was once our greatest oil pioneer and was responsible for the setting up of the old Anglo-Persian Oil Company. It still holds 21.6 per cent of the BP equity and about 2 per cent of Shell. In 1962 an attempt was made by BP and Shell to take the company over and extinguish it and it is perhaps a pity that the attempt came to nothing. It seems to haye stirred the management into somewhat frantic and aggressive action.
Why the Burmah management ever wanted to diversify and acquire stakes in British industry I have never understood. Castrol was a good buy but why take over Rawlplug, Halfords, Curlew and Major, and Quinton Hazell which then included Standard Tyre? The Hazell acquisition cost £57 million. Mr Quinton Hazell was clearly a brilliant industrialist who might have made a success of the company's industrial hotchpotch but he was never allowed to and left the board in a huff, selling his shares at near the top. So did Mr Blake of Standard Tyre who had nearly a million Burmah shares out of his Hazel! holdings. Mr Blake tried to organise a shareholders' revolt but by this time Mr Nick Williams was in firm control and out for big oil game in America.
His first attempt — to take over the great Continental Oil — was a failure because BP would not play, but his second attempt — Signal Oil — succeeded with a bid of $480 million. It was not a great oil company — in fact, it was rather tatty — but it had interests in our North Sea, including a 19 per cent stake in the important Thistle field. This was a good match for Bur mah's interest in the still more important Ninian (Jurassic) field. All this came on top of various Canadian acquisitions and a huge build-up of the company's tanker chartering — far more than was required for the ill-starred Ellesmere Port refinery. In the last half of 1973 the chartered tankers, operated by the remarkable Mr Kulukundis in New York, made a killing but then ran into heavy losses last year. What caused the Burmah crash was a technical breach of the conditions attaching to the ten-year dollar loans raised through the Orion Bank and the Chase Manhattan which had risen to $650 million. The market value of the collateral held, that is, the BP holding, had fallen from £440 million to £180 million!
The rescue operation was not particularly difficult. The Bank of England demanded new management and then took over Burmah's holding of BP and Shell as security for a one-year Bank loan sufficient to pay off $650 million borrowings. During the year Burmah must therefore sell $650 million of its assets. It is already in course of selling $110 million of Canadian assets and the American oil and gas reserves of Burmah and Signal should bring in $500 million. In addition South American assets should realise $115 million and Burmah's share of Woodside oil and gas in Australia some $75 million. Withdrawal from America and Australia should leave a much smaller but better integrated oil company — the sell-off of the UK industrial complex must wait for better days — which could concentrate on the North Sea development. But, as you might expect when the socialist tail is wagging the governMent dog, the company has had to agree to the grab purchase of 51 per cent of its stake in the Thistle and Ninian fields.
Before the Labour Government criticises the management of Burmah Oil let it put on sackcloth and ashes and confess that it has grossly mismanaged the development of our North Sea oil resources. Its proposed new petroleum tax and its unfair insistence that you cannot offset the loss on one field against the profit on another has turned the oil industry sour. Who wants to gamble millions on a drilling platform in the most expensive and dangerous off-shore fields in the world, if the national government is going to tear up existing contracts and give you a new one which treats you like a potential swindler? Mr Harold Lever has been called in to assure the oil companies that they will be able to earn good profits which will be unharmed by the 51 per cent participation. He will need a miraculous conversion on both sides.
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