BP plc (BP)
Q2 2008 Earnings Call Transcript
July 25, 2008 9:00 am ET

Executives

Fergus Macleod - Head of IR.
Tony Hayward – Chief Executive Officer
Byron Grote – Chief Financial Officer
Iain Conn - Chief Executive, Refining and Marketing Business
Andy Inglis - Chief Executive, Exploration and Production
Vivienne Cox – Head of Alternate Energy

Presentation

Operator
Welcome to the BP presentation to the financial community webcast and conference call. I now hand over to Fergus MacLeod, Head of Investor Relations.

Fergus Macleod – Head of Investor Relations

Hello and welcome to BP’s second quarter 2008 conference call. My name is Fergus Macleod, BP’s Head of Investor Relations. Joining me today are Tony Hayward, our Group Chief Executive, Byron Grote, our Chief Financial Officer, Andy Inglis, Head of Exploration & Production, Ian Conn, Head of refining and Marketing, and Vivienne Cox, Head of Alternative Energy. Before we start, I''d like to draw your attention to this next slide. During our presentation toady, we’ll be making forward-looking statements. Actual results may differ from these plans or forecasts for a number of reasons, such as those noted on this slide and also in our SEC filings. Thank you and now over to Tony.

Tony Hayward – Chief Executive Officer

Thank you, Fergus. Ladies and gentlemen good day and welcome to our first half result for 2008. In a moment Byron Grote will take you through the second quarter in more detail but Id like to start by highlighting some of the major themes. I said in February that 2008 should see operational momentum building across our businesses feeding through into financial momentum in the second half of this year and into 2009. That’s what we are seeing. Overall we are heading in the right direction and today’s results are another step along that path. Recovery is particularly evident in the upstream where we’ve been able to capture the benefit of a strong environment with rising underlying production, good cost control and a number of key start ups, all of which has resulted in strong cash flow generation. In refining and marketing there has been important progress in restoring operational reliability in our US refineries and we are also beginning to see progress in simplifying the business. However, the margin environment especially in North America is challenging and this has limited the benefit to the bottom line. We are operating it seems to me, in interesting times.

The world’s economy is weakening and the global geopolitical situation is delicate. The oil price continues to be high and volatile. Against this background, BP is making steady progress.

Let me give you the summary of the numbers. Replacement cost profit for the first half of 2008 was $13.4 billion up 23% on the same period last year. Earnings per share are up 26%. Unlike 2007, when several key assets were offline, or delayed in starting up, our operations in 2008 can be better described as what I call ‘silent running’, and that’s the way we intend them to stay. In our E&P business, this is delivering underlying production momentum, which is sufficient to more than offset the effects from production sharing contracts that we talked about in February. In addition, strong cost discipline is allowing us to capture more of the upstream margin. We are also delivering planned operational improvements in the US refining but into a weak margin environment. Outside of the US, our refining and marketing businesses are operating well. All this is feeding through into very strong cash flow generation with post tax operating cash flow rising 25% to $17.6 billion in the first half, despite high working capital requirements.

This performance is underpinning the step up in the dividend we announced in February. The oil and gas industry continues to be one of the best sources of income for investors and I hope that is of some comfort in the current difficult economic environment. Today, we are announcing a further increase in the quarterly dividend to $0.14 per share, 29% higher than a year ago. This sterling dividend is up 33% year-on-year.

In summary, the first half of 2008 has seen BP make satisfactory progress along the course I laid out in February. We have the wind in our sails in the upstream although in the down stream it feels more like sailing into a gale. Let me now hand over to Byron to go through the results in more detail.

Byron Grote – Chief Financial Officer

Thank you, Tony, and good day to those joining us on this call. As usual I’ll begin my review of the quarter with the trading environment. The table shows the percentage year-on-year changes in BP’s average upstream realizations and the industry indicator refining margins for the second quarter as well as year-to-date. In 2Q, our liquids realization exceeded a $109 per barrel, 76% higher than a year ago and 21% higher than in the first quarter. Our gas realization increased to $6.63 per 1000 cubic feet, 49% higher than last year and 13% higher than the previous quarter. Taking, both oil and gas together, 2Q and year-to-date total hydrocarbon realizations were over 60% higher than last year. Compared with the previous quarter, total hydrocarbon realizations were 21% higher. Our refining indicator margin of $8.19 per barrel has increased compared to the previous quarter though remained at less than half the level of 2Q, 07. Year-to-date it is down 50% when compared with 2007. Actual refining margins have been negatively impacted by higher energy costs and product price lags, which are not reflected in our indicator margins.

Turning to the financials, our replacement cost profit of $6.9 billion was 6% higher in absolute terms than 2Q, 07. Our profit including inventory gains and losses was $9.5 billion, $2.1 billion higher than last year. Non-operating items and fair value accounting to effect had an unfavorable impact of $1.8 billion on the results, including a $160 million for restructuring charges supporting the forward agenda. Adjusting for these items, the 2Q results represent the highest quarterly replacement cost profit ever achieved by the group. Operating cash flow was $6.7 billion, 10% higher than a year ago. Cash flows were adversely affected by the substantial increase in working capital associated with the sharp increase in oil and gas prices. As Tony just indicated, the $0.14 per share dividend announced today, which will be paid in September, is 29% higher than a year ago.

I’ll now turn to the segments. In E&P, we reported a pre-tax profit of $10.8 billion for 2Q, up $3.7 billion compared with last year. The 2Q results included an unfavorable impact from fair value accounting effect of $370 million and a net charge of $2 billion for non-operating items, primarily from embedded derivatives associated with a number of long-term North Sea gas sales contracts. This accounting charge marks to market the difference between the various forward indices under which the gas was originally sold versus forward UK national balancing point gas prices. Excluding these items, our underlying result was $13.1 billion compared with $6.8 billion in 2Q, 07. This reflects benefits from higher realizations and strong underlying production which was partially offset by higher costs. Reported production of 3.8 million barrels of oil equivalent per day was probably flat when compared with a year ago. Adjusting for the impacts of the production sharing agreements, underlying production grew by 6%.

TNK-BP contributed $1.35 billion to our 2Q results, nearly $700 million higher than 2Q, 07, reflecting higher prices and a greater benefit from lagged tax reference prices. The 2Q, 2008 tax lag benefit is around $500 million. As you may recall, price lags built into the calculation of Russian export duties have a favorable impact on the rising market and a reverse effect in a falling one. Our refining and marketing pre-tax profit was $540 million. This included a net charge of $260 million mainly related to restructuring costs and unfavorable fair value accounting effects. Excluding these items, the underlying result was about $800 million, half the $1.6 billion level of a year ago. This reflects significantly weaker US refining margins which more than offset higher refining throughput from Whiting and Texas City and lower turnaround activities and good operating performance in other parts of the portfolio.

Our fuel value chains, which comprise refinery supply, logistics, and marketing activities, experienced both lower sales volumes and flat or reduced margins as a result of higher fuel input costs and lower demand. Our international businesses which include lubricants, chemicals, LPG, aviation and marine fuels, continue to perform well in a challenging environment and have been able to recover higher feedstock prices. Despite the difficult environment this segment is demonstrating considerable progress in underlying performance. Adjusting for changes in the environment the underlying performance of this segment for the first half of ’08 was around $600 million better than a year earlier. In other business and corporate, our second quarter underlying charge was a $190 million. Relatively lower charges for the first half have reflected benefits on a number of one-off item and effect cost phasing. For the remainder of the year we expect the underlying charge to be in line with our earlier guidance.

Turning now to cash flow, this slide compares our sources and uses of cash in the first half of 2007 and 2008. Operating cash flow increased to $17.6 billion up 25% and disposals provided a further $300 million. We used this cash to fund $9.4 billion of organic capital expenditure, up 23%, and $6.8 billion of shareholder distributions. We’ve rebalanced our distributions in favor of dividends in response to feed back received from shareholders. Dividends paid in the first half of the year were $5.1 billion, up 28%. Our net debt ratio was 19.4% at the end of 2Q, which remains at the lower end of our targeted range. In the current volatile and uncertain environment we believe this strong balance sheet leaves us well positioned.