More on BP
BP: Q2 trading statement
Oil giant BP reported flat production for Q2 2006 in comparison to the same period last year.
The company’s production is still recovering from storm damage at the end of last year. Overall production for Q2 is expected to be around 4,010mboed compared to 4,110mboed in the same period last year. Excluding volumes from TNK-BP operations (the company’s joint venture in Russia), production in 2Q’06 is expected to be around 3,010mboed, against 3,041mboed in Q1 2006, the lower production mainly being due to what the company tactfully described as “divestments”.
In reality, this was mainly due to appropriations in Venezuela, after the state demanded a larger component of the volumes pumped. An explosion in a Texas refinery also contributed to the lower output.
BP’s net share of production from TNK-BP is expected to be around 1,000m boed, compared to 994m boed in Q1 2006.
Despite the significantly higher oil prices in the second quarter, the company warned that refining margins would be lower than that suggested by the indicative oil prices while marketing margins would be similar to the first quarter.
Oil companies hedge their sales, selling substantial quantities in the forward markets, therefore short term increases in oil prices are not immediately reflected in the bottom line. In the downstream marketing business, crude oil becomes an input cost and higher prices put marketing margins under pressure, hence the flat margins.
The Venezuelan problem highlights one of the key issues facing the oil majors – the difficulty in increasing output in a world where much of the reserves are in unstable and unfriendly regions. It also explains BP’s interest in stolen property – namely the Rosneft IPO where assets appropriated under controversial circumstances are being bundled together and listed.
BP has a large Russian exposure and an investment in Rosneft would be viewed favourably by the Russian government. It may also lead to further drilling rights in Russia (retail investors considering the Rosneft IPO would do well to bear in mind that the principal reason for the oil majors to invest in the IPO is the possibility of drilling rights and not a straightforward return on the investment itself). BP is also facing an investigation by the US Commodity Futures Trading Commission and Justice Department into alleged attempted manipulation by three BP traders of the US propane market but the company is yet to issue a statement on the matter.
With oil prices at record levels the company should have little difficulty in maintaining margins but growth in output is more difficult to achieve.
Prospects are still fairly good but in terms of performance, smaller oil stocks such as Tullow and Dana will easily outperform the oil majors.
The share trades at 642p, on a prospective PE (2007 earnings) of 10.2x, reasonably valued with a yield of 3.4%.
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