Important strategic steps have been taken to strengthen Hydro, but the economic results are not good enough. This is how Eivind Reiten sums up his first annual result as chief executive.
Short summary: Prices for oil, light metals crimp 2001 earnings
"Even though we didn't reach the same record level that we did in 2000, we mustn't forget that our substantial efforts in 2001 have brought about one of the best results in the company's history, despite difficult market conditions for important products. However, we cannot be satisfied. We still have work to do before we can offer a good enough return on the company's total capital," Reiten says.
Net income of NOK 7.9 billion is NOK 6 billion lower than in 2000. Weaker aluminium markets and the fact that oil prices were significantly lower explain a lot. But not everything.
Room for more
"In 2001 we made preparations for the acquisition of VAW aluminium AG, one of Hydro's most important strategic steps ever. Our aluminium operation is now number one in Europe and will be a key global player. Agri is clearly the global leader in this sector through its successful turnaround operation. Oil and Energy has created a good starting point for increased production and has acquired very interesting positions outside Norway. Altogether, we are stronger than ever within each of our business areas," Reiten points out.
His message for 2002 is clear: There is a need for, and room for, improvement. More can be done - lots more. But improvements have to happen fast.
The improvements he aims to achieve are already set in motion, some which are related to the announced improvements in Aluminium, where integration of the newly acquired German aluminium company VAW is a central factor.
"Delivery according to plan is not the only key to creating the results we want in the future. We also have to demonstrate the organization's ability to bring about major changes in a relatively short time," he says.
According to Reiten, the successful turnaround in Hydro Agri illustrates the company's ability to get the job done. In addition to changing this business area from a problem child to an exciting and promising focus area, Agri Turnaround has demonstrated the organization's great potential in a new and convincing way.
"I'm impressed by the ability to change Agri has shown. At the same time, we'll demonstrate that the ability to change is no less in our other business areas. Hydro Aluminium is currently in the middle of an ambitious change process, which in many ways has been inspired by the achievements in Agri. The acquisition and integration of VAW provides an extra jolt for the reorganization that was already underway, but it also brings some additional challenges. During the course of the coming year we will concentrate our efforts and reduce costs by a total of NOK 1.6 billion," he says.
Reiten points out that he has given top priority in 2002 to ensuring that the integration and change process is successful and the economic synergies intrinsic in the acquisition are realized.
Bringing debt down
At the end of 2001, Hydro had considerable cash reserves and a very strong financial position, which made the acquisition of VAW possible.
"It's important that we bear in mind that our gearing ratio after the purchase of VAW will increase to give a long-term debt/equity ratio of around 0.7. One of our key targets is to bring the debt/equity ratio back to 0.5, which is our target level. Stringent capital discipline in all areas of the company is therefore imperative. We will also direct sharp focus to disposal of operations that are outside of our core areas - Hydro Petrochemicals, the Danish feed and agriculture company KFK and VAW Flexible Packaging.
Although the challenges and opportunities facing the Aluminium area are great, there are equally high expectations for Oil and Energy.
Oil production started, albeit somewhat delayed, in new fields off Angola and Canada just before and just after the end of the year respectively. This increases Hydro's international oil production considerably, and in the fourth quarter the company's total production from both Norwegian and international fields amounted to 451,000 barrels of oil equivalents a day. Meanwhile more reserves were added during 2001 than the company produced, giving a reserve replacement of 122 percent.
"In the international arena 2002 was, without parallel, our most exciting exploration year so far. The next months' charting, which will clarify whether the potential we hope for and believe in really is there, is more than just interesting seismics. Therefore we focus all the expertise we can, together with our international partners, on ensuring that exploration drilling proceeds as intended.
Safety high priority
Several tasks stand out in the oil arena at home: "One is to continue the work on improving operations on the fields for which we are operator. Although this is sometimes overshadowed by other tasks in our communication activities, it is absolutely fundamental as it is the source of so much of our cash flow. The other main task, both for our oil operation and our other areas, is to improve safety. Much was achieved last year. We have found that there is often a clear connection between good operations and positive safety results. It is therefore both important and proper to mobilize even more effort with this in view.
"The 17th licensing round on the Norwegian continental shelf is another top priority task. We have put extensive work into our preparations. A successful application is central to Hydro in its role as oil company," Eivind Reiten points out.
Also important is the Ormen Lange project. The development of the second largest and the most demanding gas field on the Norwegian shelf is one of the toughest challenges Hydro's organization has ever faced.
"This project is going according to plan, and we shall ensure that we remain on schedule so that the plan for development and operation can be delivered at the end of 2003," says Reiten.