UK: THE DAVIDSON INTERVIEW - GRAHAM HEARNE.

UK: THE DAVIDSON INTERVIEW - GRAHAM HEARNE. - With the announcement of Enterprise Oil's latest figures, Graham Hearne emerged from the shell into which he withdrew two years ago after the failed bid for Lasmo. How, asks Andrew Davidson, do pronouncements

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Last Updated: 31 Aug 2010

With the announcement of Enterprise Oil's latest figures, Graham Hearne emerged from the shell into which he withdrew two years ago after the failed bid for Lasmo. How, asks Andrew Davidson, do pronouncements he made then about the need to join the 'big boys' square with the current strategy?

Graham Hearne's recipe for running a good oil company is, on the face of it, teasingly simple. 'You have to find your reserves at a low finding cost, develop them for a low development cost and produce them at a low production cost,' he says, pausing briefly to flash a toothy grin. 'If you do all of those things well, you will make money and add value for your shareholders,' he adds. But life, he acknowledges, is never that easy. You also have to sort out where the company is going and how it is going to get there.

At Enterprise Oil, where Hearne has been in charge since the company was created out of British Gas's old oil assets in 1984, that journey has had its jolts of late. Two years ago, after a decade of remarkable growth, the oil explorer embarrassed itself (and its advisers) by failing very publicly in a hostile bid for rival Lasmo. Like a tortoise thumped on its shell, it swiftly withdrew from the limelight and returned to the finding-developing-producing bit of the equation.

This spring the effort was rewarded when Enterprise produced some very respectable financial results - output up, operating costs down, net income leaping 43% to £101.6 million - which gave a perky boost to its shares.

Hearne, the engaging, Birmingham-born lawyer who likes to surprise people, re-emerged from hibernation with a smile on his face. One almost doesn't dare ask: what next for corporate strategy?

First, of course, Hearne has some explaining to do. Now, at 59, executive chairman of Enterprise (in what appears to be an amalgamation of his previous titles of chief executive and chairman), he knows that the fall-out from the Lasmo bid continues to radiate alarm among certain sections of the City and the media.

Some still wonder how the company squares its bid arguments with the reality two years later. 'You need size and scale to make meaningful and lasting progress. This is a big boys' game,' Hearne told the press when launching the bid for Lasmo. He was right, of course (take BP, for example: its exploration arm alone posted third-party sales of over £4 billion last year, compared to Enterprise's £763 million turnover, and its total market cap of £32 billion dwarfs Enterprise's £2.3 billion) but the words are likely to haunt him for some time to come, and not just, as his rivals chuckle, because he is hardly the tallest man in the business himself.

If he ever felt under threat, Hearne doesn't show it now. Sitting by a conference table in his fourth-floor eyrie overlooking Trafalgar Square, he doesn't so much talk as confidently banter, exuding pent-up energy.

Short, with a wide, alert face, and fidgety fingers, he has a comic side - all Jerry Lewis teeth and sudden gesticulations - which he readily plays up to.

Add to that the faint traces of Brum still in his accent, the very unCity-like, mid-blue, double-breasted suit and even the rather extraordinary oil painting of '40s starlet Susan Hayward that hangs by his desk, and you swiftly perceive you are dealing with a boss who is not going to be bound by anyone else's conventions. Friends say it is probably a bit of an act but also that you would be foolish to underestimate him. With over 40 years' experience in law, banking and manufacturing, including stints at Rothschild and Courtaulds, his reach is far greater than just the oil business.

At times it has needed to be, for in truth running Enterprise has always been a rough ride. Its 'privatisation' in 1984 was a flop - its launch was only rescued by a last-minute intervention from RTZ, which mopped up shares no one else wanted - and even after Hearne stamped his mark on the company, building it into one of Britain's biggest and most successful oil independents through a series of shrewd company and asset acquisitions, it remained dogged by takeover rumour of one sort or another.

The problem has always been the nature of its business. As an exploration and production (E&P) specialist, Enterprise has never had the distribution systems of giant rivals like BP and Shell, and has therefore always been more vulnerable to externalities such as swings in the oil price and fluctuations in the exchange rate (oil is priced in dollars). With its tiny workforce (around 600 permanent staff now) and a good track record in finding oil, it has also looked decidedly tempting for others to swallow.

Indeed for many shareholders, its attraction, apart from the fact it has always paid good dividends, is that it has looked such a good target as the oil market has contracted. Mike Pink, Hearne's group managing director and an ex-Shell man, laughs at the observation and says he remembers his old employer running the rule over Enterprise about once a year. French giant Elf, which until earlier this year ran a joint venture operation in the North Sea with Enterprise, was another obvious suitor. But so far, somehow, Hearne has kept Enterprise out of the big boys' grasp. Hence, perhaps, the point about wanting to be one himself, and the difficulty he has now created for himself.

'I think there was concern when we bid for Lasmo and didn't get it that we really needed it,' says Hearne, keen to banish the bid stigma.

'Maybe we gave the City that impression but I did say that we didn't need Lasmo in order to correct a lack of opportunity in our portfolio. What Lasmo was about was putting two and two together and getting five or six.

Funnily enough the portfolio which has just delivered the goods is almost exactly the same as we had two years ago.'

Yet even his friends admit it would have become increasingly sticky for the Enterprise chairman if he had not delivered such good figures this spring. A case of good timing? 'It has taken us a couple of years to get over the Lasmo effect,' he agrees, acknowledging the public relations problem, at least. 'If you had asked me before, I would have said it would only have taken one year, but I think you have to do time a bit more in the UK. Our strategic vision has not changed, though.' This is, he says, 'to grow Enterprise as a quality E&P company'. Meaning? 'The quality of technical input, the quality of analysis, the quality of reserves, all aspects of the business. I would like Enterprise to be not the biggest but the best quality.'

So sheer size is less important now? Hearne responds carefully: 'I do think a certain amount of scale is a factor and I still believe that, and we have that scale, but we are looking to grow, and hopefully not at the expense of quality.' Into which, you can read what you want.

'Confidence tinged with caution' is how Hearne sums it up, doubtless keen to ensure that he offers no more hostages to fortune. Recent discoveries in the North Sea and southern Italy look highly promising, his own partnership with Pink, who joined the company two years ago and whose E&P background complements Hearne's financial expertise, appears to be working well, and the only cloud on the horizon is the possibility that the oil price will weaken, especially if Iraq is allowed to come back into the market fully. It could have been a lot worse.

Only four months ago at least one newspaper was noting that few analysts thought Enterprise's share price would suffer if Hearne left. One was even quoted as saying it would actually be boosted. This can be dismissed as standard media bitchiness - the sort that irritates Lord Hanson so much, no doubt - but it must hurt. In fact, Pink says that the real shock of losing the bid was not the loss itself - that was always a risk - but 'the rather bloody reaction of people scoring points off you' afterwards.

That has left its mark.

Yet no one should be surprised that Hearne has bounced back from the Lasmo failure so competently. He has built his career out of seizing the right opportunities in unlikely circumstances. Born in Handsworth, Birmingham, just before the second world war, he was brought up in a large family with five brothers and sisters. His father was a cycle-liner (painting the bits on motorbikes) at the local Meridon works. Hearne himself, the eldest son, turned down the chance to go to college and left school at 16 to join a local law firm on £1 a week. He was clearly ambitious. Within 10 years he had qualified, jumped to a bigger law firm in Birmingham, and then thrown all that in so he could emigrate to America and get a job there.

After weeks of rewriting American recruitment forms - 'I hadn't majored in anything, I wasn't a member of Phi Beta Kapa (the oldest American college fraternity) and I couldn't really make sense of any of it, so I just used to cross it all out and write out my CV on the back' - he eventually got taken on at a New York attorneys' office. Four years later he was offered a partnership. But to qualify for this, he needed another year's legal experience in Britain.

A swap deal was arranged with solicitors Herbert Smith in London, and with it, Hearne neatly side-stepped the British class system to land a post at one of the City's most blue-blooded practices. He makes it sound like serendipity, but there was probably more to it than that. Once back in Britain, he was poached for Harold Wilson's Industrial Reorganisation Corporation (IRC), and New York faded into the distance.

Good experience, though? Hearne agrees the American jaunt sharpened his business edge. 'In America lawyers are always that much closer to the process of business, they are less so here. Here they are called in to push through the paperwork after the decisions have been made.'

At the IRC, Wilson's vehicle for reorganising ailing British businesses, he had the time of his life, he says. Other bright sparks recruited included Sir Christopher Hogg, now chairman of Courtaulds, and John Gardiner, now chairman of the Laird group and an Enterprise non-executive director.

The principle for selection to the IRC was pretty simple, Hearne laughs.

'Ronnie Grierson, the IRC's managing director, didn't actually want to recruit anyone, he wanted people on secondment. So he went to his favourite accountants, his favourite bank and his favourite law firm, and asked, "Have you got anyone?"'

Herbert Smith pushed the 'unconventional' (his own words) Hearne forward.

He ended up running 'electricals and electronics' with Hogg, telling the likes of GEC, Ferranti and AEI what to do. 'You couldn't not enjoy it, could you?' he giggles. 'Looking back on it, it was outrageous, but you did have access to everyone.'

While at the IRC, Hearne caught the eye of N M Rothschild, which snapped him up in 1968. He stayed nine years before deciding to make the leap into business proper with Courtaulds, but remains a director of Rothschild.

The bank's chairman, Sir Evelyn de Rothschild, describes him as a 'very close' colleague. Courtaulds taught him a lot, but was not much fun, says Hearne, because the company was in a terrible state and most of the time his job as finance director seemed to involve making people redundant.

Four years later he was headhunted to be chief executive of the independent oil company, Tricentrol, which had noted his role negotiating oilfield acquisitions for clients at Rothschild. It was not a totally happy time - Hearne apparently fell out with Tricentrol's chairman - and more than a few were surprised when he emerged, after a brief stint running another small oil explorer, Carless, Capel and Leonard, as the Government's choice to run Enterprise in 1984. By reputation, E&P is a rough, macho world where the skills of personable bankers are probably not too highly rated.

Yet Hearne has made the company his own.

How? Hearne laughs. 'The hairy-arsed image of E&P is not all true. Technology has changed a lot of it,' he says. And at senior management level, running an oil business has become a much more subtle game, requiring the skills of the City and business in the 54e widest sense. As Hearne remarks wryly, the days of the old boys who just shipped up anywhere, drilled and said 'bugger the environment' are long gone.

More to the point, says his old IRC colleague, John Gardiner, Hearne has proved himself a very good businessman. 'When he went into Enterprise he had a good oilfield that was producing money and nothing much else.

He could have left it as it was and he wouldn't have got much criticism.

But it was his ability to acquire companies and oilfields and put them together with the right colleagues which was fundamental to Enterprise's success.'

In fact the key to the man, say those who know him, is that he is actually a much more prudent and wary manager than his outgoing personality suggests.

While some have accused him of a confrontational style, just as many attest that this is not their experience. He actually has a way of handling people which, says Pink, is far less abrasive than that found in more traditional E&P outfits. He is also is a genuinely funny person just to be with, and a man whose own brush with personal tragedy - one of his daughters died in a car crash five years ago - enables him to keep things in perspective.

In a sector where risk is usually shared by working hand-in-glove with bitter rivals, that approachability is an asset. It has also helped Hearne bring through a new generation of managers at Enterprise, after a lot of his original colleagues moved on, many of them cashing in on the high value that the company's success has put on their services.

Hearne says experience has taught him that the key to good management is simply giving people confidence and getting rid of their insecurities.

It sounds simple, but of course it isn't. 'If you can pitch at a man's strengths, he can walk on water. If you push him down on his weaknesses, he becomes insecure, loses confidence and then isn't even good at the things he is normally good at. I believe building people's confidence is massively important. Everyone is better at some parts of the jobs than others.'

So what is he weak at? The question catches Hearne on the hop, and for the only time in the interview he looks rather flustered. 'Weak bits, um, well ...' Avoiding tough questions, perhaps? 'Yes,' laughs Hearne, 'I'm ducking.' He later confesses to being irritable with people he suspects of 'not doing their homework on their own time'. This can, apparently, make analysts' meetings with Hearne interesting affairs.

Which may perhaps explain why there was a certain amount of Schadenfreude in some City circles at Enterprise's failure to make the £1.45 billion Lasmo bid stick two years ago. The Times described the botched bid as 'the most absurd takeover saga of the '90s', and highlights included the leaking of the bid to insider dealers, the savaging of Enterprise's accounting standards (totally unfairly, Hearne insists), the ridiculing of the 'big boy' pronouncements, and the eventual, minuscule take-up of the offer by Lasmo shareholders.

Hearne, not surprisingly, doesn't want to talk about it any more but acknowledges now that Enterprise got the timing wrong - the City had just subscribed to a Lasmo rights issue, and wanted to give it the benefit of the doubt, he says - and misjudged quite how vigorously its target would defend itself. Yet surely with his experience at Rothschild, his renowned expertise at acquisition, and with Warburgs batting on Enterprise's side, someone should have picked up the correct signals about City sentiment?

Does he blame his advisers? 'No,' Hearne says, 'it is our responsibility to conduct the bid. The glory of succeeding and the misery of failing is ours. That is not to say that we didn't all make mistakes but at the end of the day it was our decision to make the bid and we have to accept it. And believe me, it wasn't a one-man decision.

'But,' he continues, 'I do think we deserve credit for not succumbing to the temptation of throwing money at it. If you do that, you overpay significantly and your shareholders pay the price afterwards.' Of course, Enterprise suffered by losing the bid (at an expense of nearly £6 million in professional costs alone) but would have suffered even more, Hearne maintains, if it had won by overpaying.

Indeed some even believe that Enterprise may have benefited from the failure in that the setback has forced the company to concentrate on developing its own assets properly, and on growing organically in a similar manner to the strategy pursued so successfully by its larger rival, BP. Even so, Hearne is well aware that the bid failure is now a stick with which he can be periodically beaten by those who are keen to drive his shares this way or that.

So too is his insistence on paying big dividends (or 'divis', as he rather fondly calls them) which have remained at 16p for the last four years.

Some in the US want Enterprise to cut them, simply because money currently spent on shareholders could provide greater returns if invested in new and successful exploration projects. Hearne isn't committing himself to anything but points out that remembering to keep some cash back for the shareholders, rather than pouring everything into the bottomless pit of exploration, is still a good discipline, providing the cash flow is adequate.

That won't surprise his critics who have always maintained that Hearne would never be able to stay at the helm if such a reversal were to occur.

Next year, at 60, he is up for retirement, but most expect him to swap his current role for that of non-executive chairman. 'If the board wish me to stay on as chairman I probably would,' he says drily.

Should he find time, he has his interests in shooting, fishing and the theatre - he is a director of the Chichester Festival Theatre Trust - to fall back on. He is, like BP's boss Sir David Simon, quite a keen Arsenal fan too, though his heart remains with Aston Villa, he says. He is also something of an Italophile and dreams of having a house in Italy (at the moment he has to make do with homes in Kensington and Sussex). 'If I had the money, a house in Italy would suit me very nicely,' he says, with true Brummie wistfulness.

This, remember, is from a captain of industry who earns upwards of £400,000 a year and sits on the boards of Rothschild, Courtaulds and Reckitt & Colman as well. His company also has substantial interests in Italy. So why doesn't he buy one? 'Ooh,' he says, looking taken aback, 'it's quite complicated.' Which perhaps confirms that Graham Hearne is a more cautious man than at times he appears.

'Of course he is, he's a lawyer for God's sakes!' laughs one of his friends when I put this to him. But quite a bit more too, you would guess.

Biographical Notes

1937

Born 23 November, Handsworth, Birmingham

Educated George Dixon Grammar School, Birmingham

1954

Articled as solicitor, Joseph Cohen & Cowen, Birmingham

1959

Solicitor, Pinsent & Co.

1963

Fried, Frank, Harris, Shriver & Jacobson, attorneys, New York

1966

Herbert Smith & Co, solicitors

1968

N M Rothschild & Sons

1977

Finance director, Courtaulds

1981

Chief executive, Tricentrol

1983

Group managing director, Carless, Capel and Leonard

1984

Chief executive, Enterprise Oil

1990

Awarded CBE

1991

Chairman and chief executive, Enterprise Oil

1995

Executive chairman, Enterprise Oil

What People Say

'He's very, very personable, gets on with people and is full of energy and ideas.'

Evelyn de Rothschild, chairman, N M Rothschild

'He is a man of energy, enthusiasm and ideas, and perhaps his greatest strength is that Enterprise is something he has known from the beginning.

He believes in it.'

Mike Pink, group managing director, Enterprise Oil

'If Hearne went tomorrow, the share price would get a boost.'

An anonymous analyst prior to the announcement of this year's results from Enterprise

'He's a great motivator and has a very sound commercial sense, by which I mean he is a man who sees to the bottom line very quickly.'

Bill Harrison, chief executive, investment banking at Robert Fleming, and also Hearne's brother-in-law

'He's honest and objective, and he's been quite courageous. He has brought Enterprise through.'

John Gardiner, chairman of the Laird Group and a non-executive director of Enterprise.

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