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BP: Q4 results
BP unveiled record fourth quarter results, no surprise given the state of the oil market and the bumper results recently announced by its competitor, Shell. Profits were a little lower than expected however, due to production disruptions caused by the storm season.
Replacement cost profits for Q4 (ie excluding inventory holding gains/losses- a common measure used in the oil industry) rose 26% to $4,432m. Replacement cost profits for the year to December rose by 25% to $19,314m.
Earnings in Q4 were driven by the upstream Exploration & Production business which benefited from strong oil prices. The refining business was hit in Q4 by shut-downs imposed by the storm season in the US.
BP’s earnings are largely derived from upstream businesses – Exploration and Production (E&P) accounted for 84.6% of replacement cost profits (before interest and tax). Refining & Marketing contributed 14.6% and the (relatively tiny) gas and power business makes up the rest.
Given the importance of the E&P business it is pleasing to note that BP succeeded in replacing a 100% of its reserves (on a UK accounting basis or 95% under SEC rules), well ahead of its competitor Shell which managed to replace only 70%-80% of its reserves (but below the 110% that BP managed last year). Thus, BP’s medium term production capacity is likely to be stronger than Shell’s.
The company said that in addition replacing its proven reserves it has added “nearly 2 billion new barrels to its non-proven resource base last year, taking it to a total of 41 billion barrels�. BP believes it can convert about 11bn barrels into proven reserves by 2010.
The only real risk with BP is its dependence on its Russian business – TNK-BP which accounts for nearly a quarter of the company’s output. Not that this is due to BP’s management, the risk arises from the Russian government’s seemingly capricious (and generally heavy handed) dealings with foreign companies (and indeed its own oil ‘oligarchs’). Still, the oil companies must pump the oil where they find it and with much of the stable sources in decline oil companies must push into more dangerous areas, a fact that needs to be reflected in the PE.
Prospects look good, output should increase next year as storm-affected production units come on stream, the outlook for oil prices (from the view of the oil companies at least) is sunny. Trading at 655.5p, the share is on a PE of 10.7x (2006 earnings), which is in line with the sector, with a yield of 3.1%.