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Financial Times: BP

Published: February 8 2006 02:00
Greed is good, up to a point. In the past week, investors have reacted with disdain to almost $47bn of annual profits from the UK's two big oil companies. Shares in BP fell by 3 per cent after 2005 results were announced yesterday, following a similar reaction to Royal Dutch Shell's record numbers last week. BP's refining and marketing division came up short in the fourth-quarter.
Besides the effects of the Texas City refinery closure, BP's downstream business is structurally weaker than its major rivals. At 44 per cent, its coverage of final sales of oil products by its own refining capacity is low, translating into weaker downstream per barrel profits and cash flow.
BP also reduced expectations for longer-term upstream production growth. Overall, its results attest to the pressures currently being felt across the industry. But investors should focus on BP's considerable underlying strengths. Reserves replacement of 95 per cent of production in 2005 was reasonable.
The target of converting 11bn barrels of oil equivalent of existing resources into proven reserves by 2010 and a 10bn barrel exploration portfolio underline long-term upstream potential. Cost cutting and investment focused on upgrading refineries should improve downstream returns.
Perhaps mindful that these results would take the shine off, BP is also offering quite a sweetener; it will return $50bn to shareholders over the next three years at an undemanding projected oil price of $41 a barrel.
Shell, meanwhile, is still having to work hard to repair the damage of 2004's reserves debacle, and its own buyback programme for this year looks stingy. The contrast in confidence in these messages speaks volumes about the relative prospects of these two rivals. Greedy investors should go where the money is.

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