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BP sees challenges in spite of record profits

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By Ed Crooks in London and Sheila McNulty in Houston

Published: February 4 2009 02:00 | Last updated: February 4 2009 02:00

BP, Europe’s second-biggest listed oil company by market value, yesterday reported record profits of $25.6bn (£17.8bn) for 2008 but warned of “a much more challenging environment” because of the fall in oil and gas prices.

Its results, which showed a 24 per cent drop in net income to $2.6bn for the fourth quarter, illustrated the difficulties that falling crude prices have caused large international oil groups.

While the price of oil for immediate delivery has remained close to $40 per barrel over the past two months, longer-dated futures prices have been drifting lower.

The futures market implies a steep recovery in prices to about $55 per barrel in a year’s time.

However, executives and analysts are planning for the prospect of oil staying at today’s levels for longer. That could put pressure on all companies and trigger a fresh round of mergers.

Robin West of PFC Energy, the consultancy, said: “The bottom of the cycle presents huge challenges but also great opportunities. Those companies that have the strength will clearly prevail in the long run.”

Bernstein Research has calculated that if oil stays at $35 per barrel, only ExxonMobil of the US and Total of France out of the leading international oil companies will be able to cover their investment programmes from their cashflow. BP and Royal Dutch Shell, Europe’s biggest oil company, would have to borrow to cover capital spending, and then need more to pay dividends.

The big oil company showing the greatest sign of strain, however, is ConocoPhillips, the third-largest in the US.

In its results last week, it reported a $34bn writedown on asset values and 1,300 job cuts.

Mark Flannery of Credit Suisse Global Energy said Conoco would have a tough task persuading investors it could weather $45 oil.

Exxon, the world’s largest listed oil company, set a record for US company profits with 2008 net income of $45.2bn.

Yet analysts have questioned its long-term strategy; it is spending a large amount on share buybacks – a planned $7bn this quarter – and commits a lower proportion of its cashflow to capital spending than its competitors.

However, Bernstein suggested in a recent report that “2009 could be ExxonMobil’s year”.

The company has $31bn of cash on its balance sheet, giving it the firepower to make large-scale acquisitions in the downturn.

BP strategy, Page 17 www.ft.com/lex

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