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BP’s 2004 results were in line with the trading statement, with fourth quarter profits lower than the third quarter, although significantly above the fourth quarter results last year. On a replacement cost (RC) basis, profits before interest for the fourth quarter were US$5,571m, down 4.8% on the previous quarter but up 48% compared to the same quarter last year. Output was marginally below the 4 mboe target set last year, although this is still BP’s highest annual output in more than 30 years. BP also announced a 26% increase in dividend for the quarter to 8.5 cents.
BP has four main businesses Exploration and Production, (80% of operating profits), Gas, Power & Renewables (3% of operating profits), Refining & Marketing (14% of operating profits), and Petrochemicals (3% of operating profits).
BP’s petrochemicals’ business reported a loss (on a replacement cost basis) of $1,271m due to exceptional costs on business exits and the closure of facilities as well as non-operating charges on asset impairments. Higher fixed costs and adverse currency movements also contributed to the poor result.
Exploration and production profits were up 4.3% from the third quarter to US$5,093m on an RC basis. BP’s smaller businesses experienced more rapid growth in the quarter with refining and marketing profits improving by 46% to US$1,577m driven by higher margins (both refining and marketing) and an exceptional gain. Overall marketing margins for the year were weaker, despite the improvement in the fourth quarter. Gas, power and renewables profits more than doubled to US$399m due to a improved marketing and trading results, a higher contribution from the natural gas liquids and solar businesses.
BP’s production for the fourth quarter was better outside Russia with volumes rising by 5% to around 3.125 mboe due to the increased production in New Profit Centres (of Azerbaijan, Angola, Algeria, Trinidad, West Papua) (60 mboed), Alaska and the North Sea (120 mboed). During the quarter first production took place from the Holstein field in the Gulf of Mexico. Overall production for the quarter was up 4% to 4.09 mboe and annual production was up 10% to 3.99 mboe. Growth in Russian production was only 2%.
While output growth was relatively healthy, prices were less so. The increase in prices for liquids slowed from the rapid growth seen in the third quarter due to the (relatively) more stable market conditions and BP’s realisations were weaker than the market average due to a larger percentage of heavier crudes (which attract lower prices due to their high sulphur content) as well as the timing of the liftings. Gas realisations in North America did not increase as much as the market average due to regional pricing differences.
The quarterly performance was relatively weaker than the third quarter(although annual performance was still very good) due to a series of one-offs that are unlikely to be repeated next year. While oil prices have eased, they are showing signs of stability and we do not expect a sharp decline in prices due to strong underlying demand. The outlook for the sector is still good, the key concern in the medium term being production capacity.
About 40% of BP’s production this year was from its traditional stable locations in the UK, USA and Europe which are old and in decline. Its new fields are in less stable locations where political risk can jeopardise both output and costs, although this is a factor that most of the larger producers have to contend with. BP has hada bitter experience in Russia (which accounted for around a third of BP’s crude production this year) with its previous investment where a questionable bankruptcy case deprived it of its stake in one of the country’s largest oil fields. Russia increased export duty on oil from the 1st of August which is estimated to have cost the company $170m for the fourth quarter.
Reserves are not a concern, BP’s proved reserve replacement ratio was 110% overall. (Shell had a reserve replacement ratio estimated at 15-25% last year). The proved reserve replacement has exceeded production for the twelfth consecutive year.
Trading at 550p the prospective PE of 14× is at the upper end of the sector range, the yield is 2.9%
BP defines replacement cost basis profits as:
Replacement cost profit for the period includes the net profit or loss on the sale of fixed assets and businesses or termination of operations. It also includes non-operating items identified by the group, primarily asset write-downs/impairment, environmental and other provisions and restructuring, integration and rationalisation costs. These items do not meet the criteria to be classified as operating exceptional items.
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