BP British Petroleum

A strong second quarter performance was recently delivered by British Petroleum's (BP) Exploration and Production division as oil and gas prices continued to climb. With energy prices set to remain stubbornly high, we expect BP will continue to out-perform this year despite some pressure on margins for downstream products.

Production in the second quarter rose 3.5 percent over last year to 4.11 million barrels of oil equivalent per day (boepd). Production at the TNK-BP joint venture in Russia is anticipated to have risen 9.4 percent to 975,000 boepd. BP remains on track to deliver 4.1 to 4.2 million boepd in 2005.

With production levels relatively flat, we were encouraged to learn that oil and gas realisation prices rose in line with their respective benchmarks. Brent crude increased US$16.31 to US$51.63 per barrel and Henry Hub gas went up by US$0.74 to US$6.74 per mmbtu. As a rule of thumb, every US$1 increase in Brent crude, increases operating earnings US$500 million, while a US$0.10 increase in Henry Hub adds US$100 million.

BP's refining margins were impacted by a reduction in low grade crude discounts and an explosion in the US. The Marketing division's margins declined on last year due to rising oil prices and slower PTA demand in China.

Non-operating charges of approximately US$500 million will be incurred in the second quarter as a result of new accounting rules being adopted by BP. We anticipate these charges being seen in the context of a change in accounting principles and not a reflection of the group's operational performance.

The oil major's cash generating ability has remained impressive. As a result BP has been able to reduce gearing to the low end of its 20 to 30 percent target, while continuing with share buybacks.

Last week oil traded over US$60 a barrel. We believe that prices will move even higher later in the year as supply remains tight and demand is robust. In this environment, BP's stable production profile should underpin out-performance.