‘Every seat counts’ at BP | FT Alphaville

‘Every seat counts’ at BP

BP is the latest oil major to provide us with a look at how a crash in oil prices impacts an integrated oil company. Just to remind, BP was previously also part of the Q3 record-profit brigade.

Here are the results as written up by Reuters (which focuses on the replacement cost net profit as the headline number):

LONDON, Feb 3 (Reuters) – BP Plc said replacement cost net profit fell 24 percent in the fourth quarter to $2.587 billion, undershooting forecasts amid a collapse in oil prices and as its Russian unit reported a big loss.

BP’s full year replacement cost profit, which strips out unrealised gains or losses related to changes in the value of inventories, was $25.6 billion, up 39 percent compared to 2007.       Oil prices plunged in the fourth quarter but the ramp-up to a peak above $147/barrel in July ensured record annual results for Europe’s second-largest listed oil company by market value.       The results include a loss of $700 million from the company’s Russian venture TNK-BP, related to the effect of lagged tax charges, lower oil prices and asset impairment charges.

Oil and gas production rose 1 percent in the quarter compared to the same period in 2007, to 3.945 million barrels of oil equivalent per day (boepd). Full year output was 3.84 million boepd, compared to 3.82 million in 2007.       BP chief executive Tony Hayward said in a statement that he expected output to grow in 2009 and for BP to have replaced all the oil it pumped in 2008 with new finds, though exact reserve replacement figures were not published.

BP expects to hold investments in drilling and project development steady in 2009, Hayward said, following the trend among the very largest oil companies, which contrasts with big spending cuts across the rest of the sector.       Excluding non-operating items that amounted to a net charge of $18 million, net profit was $2.605 billion compared to an average forecast of $2.98 billion in a Reuters poll of 6 analysts.

Overall, the conclusion from the analyst community is that the numbers are nothing to get excited about. For one, the figures are mostly below expectations. The $2.587bn replacement cost net profit (which strips out unrealised gains or losses related to changes in the value of inventories) was down 24 per cent on the year versus a Reuters consensus of 2.98bn. Also, while the dividend has been maintained, the company has given no outlook on what to expect next year. Shares were accordingly trading about 4 per cent lower on Tuesday morning.

Looking closer, it appears much of the reduced profit came  not only from lower oil prices but also a higher than expected tax charge connected to the group’s  Russia business. Also hitting  were unfavourable forex effects in the group’s downstream business. BP says these offset a much improved refining performance overall — although it is worth remembering that much of that has come from restored capacity due to the operational return of Texas refinery.

Nevertheless BP explains:

While the global refining indicator margin (GIM) was lower than a year ago, our restored capacity allowed us to better capture the available refining margins. These improvements were partially offset by negative foreign exchange effects on in-transit crude and product cargoes, caused by the rapid strengthening of the US dollar, and by the adverse impact of prior-month pricing of domestic pipeline barrels for our US refining system.

This is curious on two fronts. Firstly BP is supposed to be very well hedged on the foreign exchange front, and secondly the reference to an adverse impact of prior-month pricing of domestic pipeline barrels suggests the US integrated supply and trading division failed rather spectacularly to spot the coming of the super-contango in the crude markets in the fourth quarter.

All that said, while the view is stil that BP’s performance is undoubtedly the weakest of the oil majors, there are some other positives. Firstly on capex, BP says it expects its ’09 figure to be flat on ’08, or if anything, just a smidgen lower. CEO Tony Hayward’s restructuring also appears to be running full-steam ahead with staff reductions totalling some 3,000 in 2008.  The middle of 2009 staff reduction-target of 5,000 even looks likely to be exceeded.

A company statement also reveals the group’s  break-even oil price remains at some $50-60 per barrel, which is also  much better than most peers.

All things considered, Hayward’s outlook is fairly optimistic:

At BP we have been managing volatility for 100 years, in good times and bad. The next year or two will be challenging, but we are well-placed to meet that challenge.” 

Oh and did we forget to say? BP also has a new mantra for its business:   “every dollar counts, every seat counts” (that would be staffing seat rather than car seat we presume).

Related links:
Shell profits lower – who would have thought? – FT Alphaville
Those big four oil major results again – FT Alphaville