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BP's Cost Cuts Boost Shares, Profit Falls 24%

Reuters
Tuesday, 5 Feb 2008 | 11:54 AM ET

Oil group BP stepped up the pace of its turnaround on Tuesday, outlining a plan to slash its workforce by 15 percent, cut over $1 billion in costs and adopt a more generous dividend policy, boosting its shares despite a big drop in profits.

The third-largest Western oil company by market capitalisation has suffered a series of mishaps in recent years including pipeline leaks in Alaska, delays in big projects which led to production falls and a blast at a U.S. refinery that killed 15 workers and highlighted systemic safety flaws.

Since his appointment in May last year, Chief Executive Tony Hayward has been working on a turnaround plan.

His decision to raise BP's dividend by 31 percent and a promise to favour dividends over buybacks in future was seen as a sign of confidence in BP's future ability to generate cash.

"The dividend is certainly a boost and underpins the commitment to cash returns to shareholders which I think will be rewarded eventually," said Jason Kenney, oil analyst at ING.

Investors also welcomed a planned reduction in administrative and management costs, which BP said would save $1-$1.5 billion per year from 2009, although this would involve restructuring costs of $1 billion in 2008.

Savings will be achieved by axing 5,000 jobs and shifting another 9,500 U.S. service station staff to franchisees out of a company total of 97,000 jobs now.

BP Climbs on Restructuring Plans
Shares in BP were trading higher on news that CEO Tony Hayward plans to enforce a major shakeup at the oil major, spending up to $1 billion to create a leaner organizational framework. Neil McMahon from Sanford Bernstein discusses Hayward's plans.

Hayward also reaffirmed BP's production growth plans to 2012, despite some rivals, such as Royal Dutch Shell, dropping growth targets as access to new reserves becomes more difficult and higher oil prices reduce the amount of oil companies are entitled to from joint ventures with governments.

BP's output fell 3 percent in 2007 compared to 2006, to 3.8 million barrels of oil equivalent per day.

"The production numbers for 2008 and 2009 are in line or a little bit higher than people were expecting, so the story going forward looks better than the story they have just produced," said Colin Morton of Rensburg Fund Management.

BP shares closed 0.2 percent higher, outperforming a 2.6 percent fall in the FTSE-100.

In the past two years, BP's shares have fallen around 17 percent, compared to a 3 percent fall for Shell and a 9 percent fall for France's Total.

Profits Fall

BP's replacement cost (RC) net profits, which strip out unrealised gains on inventories, fell 22 percent to $17.29 billion in 2007, despite strong crude prices, which went on to hit a record above $100 per barrel in January.

Hayward blamed problems at BP's U.S. refineries, including low throughput and margins, for the fall, although a drop in output and rising costs also weighed.

Fourth-quarter RC profit fell 24 percent to $2.97 billion. Underlying profits were below analysts' forecast range.

"Our fourth-quarter results were very disappointing," Hayward said in a statement.

Last week, rival Exxon Mobil reported a 14 percent rise in net income, while Chevron reported a 29 percent rise and Royal Dutch Shell's profits, calculated on a comparable basis, were up 11 percent.

Weak crude processing margins and outages led to a $1.3 billion loss at BP's mainly U.S.-based refining division.

BP's refining capacity was reduced by a fire at the Whiting refinery in Indiana and delays in bringing the Texas City facility back online after a shutdown in 2005 as Hurricane Rita threatened the gulf coast, to avoid possible storm damage.

Signs of Recovery

The planned sale of its U.S. service station network also forced the London-based company to take a $600 million charge.

However, there were signs of recovery in the quarter, with an almost 2 percent rise in production to 3.907 million barrels of oil equivalent per day (boepd) compared to the same period in 2006, the first rise after nine quarters of falling output.

"It's the end of the trough and the upturn starts in Q1 2008. It's a buying opportunity in my book," Kenney added.

BP addressed one of oil investors' big concerns by saying it found more oil than it produced last year, with a reserves replacement ratio (RRR) above 100 percent.

Many big oil companies are struggling to add reserves as producing countries reserve the richest fields for their national oil companies.

Last week, Chevron warned that its 2007 RRR would be low and Shell said it added fewer resources than in 2006 and hinted at reserves downgrades.

Excluding non-operating items, which amounted to a net charge of $1.03 billion, the fourth-quarter replacement cost profit was $4.002 billion, compared to an average forecast of $4.455 billion in a Reuters poll of 11 analysts.

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