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Times Online: BP needs all its resources if it is to make a full recovery

July 25, 2007
Nick Hasell: Tempus

Rarely can results showing that a company has made £32 million a day be received with little more than a shrug of the shoulders in the City.

So if Tony Hayward was looking to calm the storm of controversy surrounding his new charge, he achieved it yesterday, with the straightforward delivery of a set of second-quarter numbers that contained not even the slightest hint of his future strategic thinking. The new chief executive’s main priority must simply be to buy more time to right the wrongs plaguing the £115 billion company.

At first glance, these were not immediately evident. At $5.3 billion (£2.6 billion), replacement cost net income came in 6 per cent ahead of consensus forecasts. However, that overshoot was helped by a lower than expected tax rate, and still represented a year-on-year fall of 13 per cent.

But the more egregious indicator of BP’s woes lay in its weakened cashflow, which, at $6.1 billion this time round, was 33 per cent lower than last year’s second quarter. BP’s problem has been the downstream disruption that has caused a slump in production. With oil prices at near-record levels, and refining margins having risen from about $3 a barrel to $17 a barrel over the past five years, this could not have come at a worse time. Meanwhile, it will not be until next year that Indiana’s Whiting, BP’s second-biggest refinery, will be back at full capacity.

In the interim, there are reasons to believe that the tide of bad news that has plagued BP – from Texas City to Alaska and the exit of Lord Browne of Madingley– will begin to reverse. Not least, the company is expected to begin production within the next three months at its Greater Plutonio development offshore Angola, one of BP’s major new, high-margin deepwater projects on which its recovery depends. But investors will need to see firmer signs of operational improvements before the shares, which have rallied nearly 19 per cent since March, go much higher. That requires other major new projects, such as Atlantis and Thunder Horse, to come on stream as planned, and for BP to find far more oil and gas. Until Britain’s biggest oil company can attract the City’s attention for the right reasons, BP, at 590p, or 11 times next year’s earnings, and yielding 3.4 per cent, does not appear obviously cheap. Shell, whose upstream attractions are clearer, remains a more certain bet.

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