The Times: Increasingly confident BP returning to proper place

February 6, 2008
Nick Hasell: Tempus

Eight years and nearly $49billion (£25 billion) later, BP is finally reining in its blockbuster share buyback programme. The world’s third-biggest oil major accompanied yesterday’s full-year results with the declaration of “a shift in the balance between dividends and share buybacks as a means of returning value to shareholders”.

In short, that rethink translates into a 31 per cent increase in the fourth-quarter dividend to 6.8p in sterling terms, against expectations of a 10 per cent rise, and 7 per cent increase for the year as a whole. For US dollar investors, the full-year out-turn was even better – up 16 per cent. That unexpected bump-up in the payout ensured that BP was one of only three constituents of the FTSE 100 to see its shares rise. A switch in emphasis away from buybacks is partly pragmatic: having retired 16 per cent of its outstanding shares since the turn of the decade, a higher dividend is now more affordable.

But it also sends a powerful signal: halting a share buyback programme is palatable to institutional investors in a way that cutting a dividend is not. The inference is that, one year into Tony Hayward’s tenure as chief executive, BP has increasing confidence in its ability to generate sizeable sums of cash. Not that such optimism was evident from yesterday’s numbers alone. Fourth quarter replacement cost net income of $4 billion, some 8 per cent below consensus forecasts. What was expected was that the culprit was BP’s problematic US refineries business, which takes in Texas City and Indiana’s Whiting.

The company lost $192 million worldwide in refining and marketing but a hefty $834million in the US – nearly twice the level of the previous year. Although the company reported an above-forecast performance in its upstream operations – fourth-quarter production was down a better than expected 3 per cent – the benefit was offset by a higher tax charge.

With the problems in the US refineries nearly resolved – which will reduce the drag from heavy repair and maintenance spending – the focus should return to Mr Hayward’s restructuring efforts and BP’s newer producing assets.

On the view that BP’s long period of underperformance against Shell is nearing its end, the shares, at 543p – yielding 5 per cent and trading at nine times 2008 earnings – are worth tucking away for the long term. Buy.

http://business.timesonline.co.uk/tol/business/markets/article3315661.ece

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