BP: Cutting Costs, Boosting Production
Great companies exit recessions leaner, fitter and stronger for the experience. Or to put it another way; form is temporary, class is permanent. BP is arguably one of those great companies. Predictably, during the recession revenues have been hit, the collapse in the oil price from $147 per barrel to the $30’s saw to that (current price $68), but the cost base has been reduced significantly, production is growing and capital expenditure remains strong to help build reserves – the embedded value of energy companies.
The most recent quarter has seen further progress in the reorganisation of BP. Production has risen to more than 4 million barrels of oil equivalent a day, the full year target of $2bn in cost reductions has already been achieved with another $1bn in savings predicted for 2H 2009, relative to 2008 and 2nd quarter replacement costs profit rose 32% QoQ to $3,140m. Sterling investors also saw their dividend rise by 21% due to favourable exchange rate movements. The dividend for the quarter is 14 cents. Capex for Q2 was $4.8bn and $9.4bn year-to-date.
Looking forward, BP forecasts the global economy could stabilise further through the summer but that “any recovery, whenever it comes, would likely be sluggish”. Management appear to be more satisfied with their upstream progress and reassured investors that the firm would continue to focus on streamlining their alternative energy operations and securing more group wide efficiencies.
BP closed the update commenting: “Our view remains that the right current balance is to continue to pay the dividend and maintain investment to grow the company. We will continue to use the capacity of our balance sheet while the industry cost structure adjusts.”
Analysis of the chart, below, fails to provide obvious clues as to the near-term direction of the stock, with a brief correction slightly more likely than a continuation of the recent bullish run. Traders should therefore pay close attention to the oil price, which in the absence of surprise stock specific news, is likely to be the dominant factor in BP’s share price through the summer.
BP weekly to 27th July 2009
