BP: Q2 2006 Results

9:09 a.m. Wed 26 Jul 2006

Boosted by high oil prices BP’s Q2 (to June 2006) replacement cost profit was $6,118m up 23% on the same period last year. For the half year, replacement cost profit was $11,383m, up 9%.

Replacement cost profit is a measure used by many oil firms to report their profits. This reflects the current cost of supplies and excludes from profit inventory holding gains and losses.

As expected output remained flat, the better profits being due entirely to better prices and margins. Production for the quarter at 4,018 mboe/d, down slightly compared Q2 of 2005 after adjusting for the effect of disposals. The company said underlying production growth in the new profit centres and TNK-BP was offset by decline in existing profit centres.

The company’s production is still recovering from storm damage at the end of last year.

Average realised prices reached $44.39 per BOE, up 27% on last year. All oil companies produce a mix of crude, natural gas liquids and natural gas. While prices of crude oil have been very strong, gas prices have, on the whole, remained slightly weaker.

BP’s output is heavy on gas, which accounts for about half its output and is one of the reasons why the share tends to trade at a slight discount to some of its peers. BP’s realised gas prices have risen only 15.5% compared to last year. Its realised crude prices have risen by 36%.

Given BP’s high exposure to gas and the fact that historically, gas prices have lagged the sector, BP’s growth should lag the sector and its share price reflect the appropriate discount.

For the sector as a whole, prospects look good. Although growth in the world economy is slowing, unless there is a major slump, the demand for oil is likely to remain firm. Current high prices are due to increased levels of political uncertainty in the Middle East but a price of $45-$55 per barrel seems to be sustainable in the long run.

The share trades at 633.5p, on a prospective PE (2007 earnings) of 10.1x, with a yield of 3.5%.