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The Wall Street Journal: Investors Take BP’s Slippage In Output Forecasts Too Seriously

February 7, 2007

COMMENT FROM breakingviews

BP’S fall from grace in recent months has been swift. But the oil and gas titan isn’t exactly going out of its way to redeem itself — yet.

Although BP reported better-than-expected fourth-quarter profit, it also slashed its growth targets. BP said production would fall to 3.8 million or 3.9 million barrels of oil equivalent in 2007. Worse, it predicted production would reach only four million barrels of oil equivalent by 2009, compared with an earlier forecast of 4.7 million barrels of oil equivalent.

BP used to have essentially two things going for it. First, its near-term growth was supposed to be much higher than Royal Dutch Shell’s, on the back of elephantine projects like Atlantis in the Gulf of Mexico or various fields in Azerbaijan. Second, these projects were also more profitable than those of rivals. The latest news effectively knocks the first advantage down.

But the fall in production isn’t quite as drastic as it looks. By far the biggest factor in the decline of nearly 700,000 barrels of oil equivalent is a change in the assumed price of crude oil to $60 in the next few years from $40; this accounts for almost half the drop. A higher oil price reduces the number of barrels that BP can keep for itself under production-sharing agreements. Around 230,000 barrels of the decline is the result of divestments and slower activity in Russian venture TNK-BP. That leaves about 150,000 for project delays. BP says that the oil is still in the ground, but that it’s going to take longer to drill it out.

This suggests BP is low-balling expectations, in order to beat them later. That would certainly make life easier for Tony Hayward, scheduled to succeed departing Chief Executive Lord Browne Madingley in July. If that’s true, then the case for buying BP shares looks more compelling. Shares are off 25% since their peak last April, and BP has lost its premium to rivals, including Shell.

Yet BP is still spending less on capital expenditures to produce the same amount of growth, and it’s throwing off more cash. Its discount is starting to look undeserved. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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