What Do Penn Central and BP Have In Common?

I've been seeing a lot of annoying BP (formerly British Petroleum) commercials lately on television.

In times past, BP knew it was, basically, an oil company. Here's one of their old commercials.



Now BP has alternative energy information on its website, and commercials more in this direction, although it does not appear to be a very recent one.



Here's a more modern BP commercial, actually condemning petroleum usage....



This is giving me a serious case of deja vu. Could BP be channeling the failed spirit of the long-defunct, once-proud railroad, Penn Central?

While I generally eschew using Wikipedia, due to the nature of its entries being susceptible to manipulation, in this case, I can vouch for its correctness. It reads, in part,

"Penn Central management created a holding company, the Penn Central Company, and tried to diversify the troubled firm into real estate and other non-railroad ventures, but in a slow economy these businesses performed little better than the railroad assets. In addition, these new subsidiaries diverted management attention away from the problems in the core business. To make matters worse, management insisted on paying dividends to shareholders to create the illusion of success. The company had to borrow more and more to keep operating. The interest on the loans became an unbearable financial burden."

Penn Central, whose new corporate mission statement self-identified it as "a transportation company," in keeping with the then-new fad of formalized corporate planning, declared bankruptcy in 1970.

BP is now an 'energy company,' just like Penn Central left railroading to become a 'transportation company.'

The real estate, among other things, tripped up Penn Central. Plus the distractions of trying to learn and manage non-railroad businesses.

What do wind and solar energy share with oil exploration and production? Why do we think that a company with a long history of success in the latter will be advantaged to compete in the former?

Look, this blog has its title for a reason. I'm generally sceptical. I'm really sceptical about BP's shift from its core competencies in petroleum-based businesses to totally new endeavors, in different technologies.

You know what these different energy-related technologies share? A need for capital. BP is behaving more like a bank than a petroleum company. But BP isn't a bank. Nor an energy company. It's an oil company.

Let's see...where have we seen this happen before...in the oil sector....oh yes! Exxon in the 1970-80s!

My very first trip to New Jersey was as a consultant, working for the Wharton Applied Research Center. We advised the solar energy business of Exxon Enterprises.

At the time, the oil giant had decided that its future as an explorer for, and producer of oil was clouded, and that various information technologies would quench the world's thirst for oil.

Thus, Exxon created a separate unit, Exxon Enterprises, to 'let a thousand flowers bloom,' as it were. They bought early fax and other information services technologies, such as Quip and Qyx, invested in solar energy, and the like. After something like a decade, Lee Raymond shut down the expensive failure.

Today's $90+/bbl oil suggests that Exxon was a wee bit early to the 'energy diversification' dance, doesn't it? But it sounds familiar.

Environmentalists and futurists declare the oil era dead, and a petroleum titan obligingly spends hundreds of millions of shareholder dollars buying into technologies about which it essentially knows nothing.

Like Exxon and Penn Central before it, I suspect BP will be spending a lot of its shareholders' money chasing businesses and technologies with which other competitors are much more skilled.

Doesn't it make more sense to believe that a standalone wind or solar energy firm will commercialize the best technologies in the quickest manner, both for efficiency, as well as to aggressively replace petroleum- or gas-based energy where it makes the most economic sense to do so?

My suspicion has always been that an oil company will grudgingly develop alternatives to its main business, and, in doing so, carefully control the pace at which its major product is replaced. The culture of BP is likely to be skewed toward petroleum. I don't think you'll be seeing an alternative energy CEO there anytime soon. And any alternative energy activity will have to grow for years before it's a serious substitute for the earnings from oil-related activities.

It simply makes more sense to me that genuinely economic, efficient, effective alternative (to oil and gas) energy solutions will come from companies founded and focused on those technologies. Not oil companies suddenly discovering that they are really energy companies.

Perhaps BP's (and ExxonMobil's) time as a commercial giant is coming to an end. Maybe, soon, they will seem like a whale oil vendor in the early 1900s. We don't know yet. We don't even have univocal scientific opinions on whether we have discovered most of the oil on earth that ever existed.

But until then, I believe it makes more sense for BP to be the best oil company possible, and, when that is no longer a viable proposition, return its capital to its shareholders, rather than try to subtly become another type of business, with which it has no experience.

The Penn Central example ought to be a sobering one for the senior executives at BP.