British Petroleum (BP)
05/04/2005
 There seems to be no slowing down British Petroleum (BP). Earlier this week, the oil giant reported another set of impressive figures. Riding the crest of higher oil prices and improving refinery margins, BP reported a 35 percent increase in first quarter pre-tax profits to US$9.5 billion. We expect are confident of further out-performance in the year ahead with energy prices set to remain stubbornly high.
BP's Exploration and Production (E&P) business continued a record setting performance in the first quarter. E&P's pre-tax replacement cost (RC) profit before interest increased 53 percent to US$6.5 billion. Driving this robust performance were a 27 increase in oil and gas realisations, along with gains from disposals. Production was relatively flat at 4.1 million barrels of oil equivalent per day (mboe/d).
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TNK-BP continues to exhibit stellar growth. Pre-tax profit before interest increased 64 percent to US$615 million as production rose 16 percent. Recently, we were alarmed by the Russian tax authorities US$1 billion claim against TNK-BP. However, we are now less concerned with Vladimir Putin reiterating his support of the JV.
The Refining and Marketing division has continued to benefit from higher refining margins which have more than offset weakness in retail. Although refining throughputs declined slightly from 2.6 to 2.5 million barrels per day (mb/d) RC profit before interest and tax surged ahead 54 percent to US$1.4 billion.
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The Gas, Power and Renewables business more than doubled RC profit from US$201 to US$404 million. Earnings out-performance was driven by the natural gas liquids business and gains from non-operating items (asset disposal and gains on financial instruments).
Capital expenditure during the quarter totalled US$2.8 billion, with US$2.3 billion allocated to E&P activities. We believe this directed investment is crucial to BP's future production and earnings growth. We are also heartened that the company has sought to take advantage of strong margins in the refining business, investing US$331 million.
Our outlook for the price of oil in 2005 remains bullish. Despite a recent moderation of global growth rate expectations in the second half of the year, we believe that demand is still sufficiently high to maintain upward pressure on prices. In addition, there is not an abundance of extra capacity in the market to alleviate supply concerns. The same is true of refined products.
In our opinion, heavy investment has left BP well positioned to take advantage of ongoing strength in the price of oil. We believe BP's current valuation is undemanding with the shares trading on a 2005 price earnings ratio of less than 13 times, while offering a dividend yield exceeding 3 percent.
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