BP Profit Rises 26%

The company says it replaces nearly all its production for 2005.
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BP (BP) - Get Report posted a 26% rise in fourth-quarter profit and said it replenished reserves by 100% on a U.K. reporting basis and 95% under SEC rules that take account of year-end prices.

The reserves replenishment news gives London-based BP a proven reserve base of over 18 billion barrels of oil and gas equivalent at 2005-end, the company said.

"BP's fourth-quarter result was particularly hit by the continued shutdown of our Texas City refinery during its refurbishment, and significant noneconomic effects of the application of IFRS fair value accounting," said CEO Lord Browne. "Our 2005 result was a record; this reflects the quality of our asset base and operations. Innovene has been sold for an attractive price and earlier than expected. Strong operating cash flows and proceeds from disposals have enabled record distributions to shareholders."

Capital expenditure was $4.8 billion for the quarter; there were no significant acquisitions. Disposal proceeds were $9.2 billion, primarily from the sale of Innovene to INEOS.

"Average global refining margins softened to $7.60/bbl in the fourth quarter," Browne said. "The disruptions caused by last autumn's hurricanes eased during the quarter as new sources of product supply were accessed. Oil product stocks currently appear adequate to meet winter demand and global margins have softened further during 2006 to date. However, margin spikes are still possible during extended periods of cold weather and a heavier than normal maintenance programme.

"During the fourth quarter, retail margins benefited from falling product prices, particularly in the first two months of the quarter," Browne added. "During December and so far in 2006, a rise in wholesale gasoline and crude prices is evident. Marketing margins are expected to remain volatile."

Net debt at the end of the quarter was $16.2 billion. The ratio of net debt to net debt plus equity was 17%.

During the fourth quarter, the company repurchased 332 million of its own shares at a cost of $3.7 billion. These shares are held in treasury.

"World economic growth has continued at near trend rates," Browne said. "In addition to sustained growth in the U.S. and Asia, there has been an acceleration of activity in Europe; the near-term global outlook appears solid.

"Crude oil prices averaged $56.87 per barrel (Dated Brent) in the fourth quarter, a decline of nearly $5 per barrel from the third-quarter average but more than $13 per barrel above the same period last year. Prices weakened in face of ample inventories and relatively mild weather in the early part of the fourth quarter, and despite large production losses from Hurricanes Katrina and Rita. Prices rebounded in December with the onset of colder weather and have been sustained above $60 in 2006. Oil prices are expected to remain strong but remain dependent upon OPEC production levels and geopolitical concerns.

"Following a comprehensive refurbishment, the steam system at the Texas City refinery was successfully recommissioned in December 2005. Initial production is expected to commence in the first quarter, with further units restarting in a phased programme, primarily in the second and third quarters.

"Our strategy is unchanged. We continue to execute it with discipline and focus. Our ability to capture the benefit of current prices and margin strength underpins continued dividend growth and continuing share buybacks subject to market conditions and constraints. Capital expenditure excluding acquisitions for the year was about $14 billion and is expected to be around $15 billion in 2006 with divestments in the region of $3 billion."

On top of proven reserves, BP also added nearly 2 billion new barrels to its non-proven resource base last year, taking it to a total of 41 billion barrels, of which the company expects to convert some 11 billion barrels into proven reserves by 2010.

Expected capital spending for this year is some $15 billion, rising to some $16 billion in 2008. The upstream business expects to invest around $11 billion in 2006 vs. $10 billion last year. TNK-BP capex is expected to rise from $1.8 billion to $2.5 billion.

A planned doubling of refinery investment to $1.5 billion a year for the next three years would improve margins, operating flexibility and the reliability of plants. The Texas City refinery is scheduled to restart production this quarter after a four-month shutdown. The adverse impact of the closure is estimated at between $600 million and $800 million for the first quarter of this year, depending on the actual start-up date and prevailing margins, but this will diminish through the year as output rebuilds.

Elsewhere in the downstream business new cost-efficiency programs, including a 10% reduction in unit cash costs in marketing, are aimed at delivering savings of some $500 million by 2008.