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Soaring Oil Prices Help Fuel a Record Windfall for BP ; CITY FOCUS

Posted on: Wednesday, 27 July 2005, 18:00 CDT

THE SURGE in oil and gas prices this year fuelled a Pounds 1.5bn windfall for BP in the first half, driving a 29pc jump in earnings to a record Pounds 6bn. The energy giant admitted that the bulk of its growth was thanks to higher oil prices, but said it was forced to swallow higher costs.

It also suffered from weaker earnings at its petrol retailing business because of a time lag before the rise in the oil price can be passed onto consumers at the pump.

The impressive performance would have looked even better, were it not for a Pounds 403m charge from litigation and settlements relating to its Texas refinery explosion in the US. The March catastrophe killed 15 people and injured 170 others.

BP, the world's second largest oil company, also spent Pounds 2.4bn on buying back its own shares during the six months. It plans to step up the cash return to at least Pounds 3.5bn in the second half.

Second- quarter earnings climbed from Pounds 2.2bn to Pounds 2.9bn, with the quarterly dividend raised from 3.860p to 5.119p.

Chief executive Lord John Browne said the results were 'very pleasing' but admitted that 'the financial highlights have, of course, been magnified by the external environment.' The oil price for the six months averaged nearly $50 a barrel, up 47pc from last year, and it is unlikely to head south soon.

Browne hailed the group's multibillion pound investment programme as being the driver of future growth. Oil and gas production rose by 2.9pc to an average of 4.1m barrels a day during the first half.

Capital expenditure is set to be Pounds 8.3bn this year, with analysts blaming project cost hikes for the higher than expected number.

This is perhaps one of the reasons why the shares edged down 13p to 6291/2p, though they are up 23pc on the year.

Browne said there are lots of projects to boost growth, adding 'we are replete with opportunities'. Analysts at SG and Williams de Broe rate BP shares a buy.

The share buybacks and dividend increases are attractive to investors and SG reckons the 'share price momentum should be maintained with the ramp-up of new projects such as Mad Dog, Thunder Horse and Trinidad LNG.' Consumers may complain about such profits at a time when they are paying record prices for petrol.

But the bulk of BP's earnings come from its oil drilling and production operations.

It makes just 0.59p on every litre of fuel sold at the petrol forecourts, a tiny fraction of the 90.2p average price per litre. If running costs are included, then the UK retail arm makes a loss. Underlyingearnings at BP's exploration and production division rose 46pc to Pounds 7.1bn in the first half. Refining and petrol retailing profits were up 22pc to Pounds 2.5bn.

This was driven by better profit margins from its refineries, many of which specialise in producing petrol and other lighter fuel products which are in hot demand.

In the UK, losses from the refining and retailing division swelled from Pounds 123m to Pounds 185m.

Despite the poor performance, BP has no plans to exit retailing.

Price wars among petrol retailers have pushed margins to paper thin levels, and many oil companiesand independents have closed forecourts.

In 1980, there were 24,000 petrol stations across the country. Now there are just 10,000, of which 1,300 are branded as BP stations.

BP is trying to focus on high performance fuels which offer better margins.

The UK retail losses are little more than an irritation for a company which is firing on all other cylinders, with operations in countries as far apart as Azerbaijan, the Gulf of Mexico and Angola.

With annual profits set to smash Pounds 10bn, it has little need to worry.

Source: Daily Mail; London (UK)

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