Bottom Line: Promises kept and the outlook for oil is bright

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The Independent Online
IF DAVID SIMON, chief executive of British Petroleum, feels smug and self-satisfied he does his best to hide it. But the fact is that BP has more or less delivered on its promises in a ghastly marketplace and is set fair to reap the benefits of worldwide economic recovery on demand for hydrocarbons and chemicals and on firmer prices.

To add the icing to the cake, a combination of ACT write-backs, a shift in profitability to lower taxation areas and prior year credits is bearing down on BP's tax rate, which is likely to be lower than expected in the years ahead.

The company has more than met its target of axing dollars 1bn of costs out of the group since mid-1992. This has been enough to offset the erosion of upstream margins stemming from a dollars 4 fall in average oil prices over the same period and allow the full effect of lower interest charges from its disposal programme and lower taxation to flow through to net profits.

Indeed a lower tax rate explains about half of the extent of forecast upgrades yesterday in the wake of better-than-expected second-quarter figures.

Capital spending has also been reined in well below the dollars 5bn ceiling BP set for itself and is dropping further. On a rolling quarter by quarter basis the company is also within spitting distance of achieving its target of dollars 2bn for net profits.

Free cash flow has clearly entered a sustainable positive phase without the help of disposals, as has been the case previously. Gearing is now 70 per cent but some are projecting a rate of only 30 per cent in a couple of years.

This would leave BP with enormous flexibility to shape its corporate future, and after the traumas of the early Nineties it is doubtful whether those mistakes of over- expansion will be repeated.

A lower tax rate is one thing. But the new outlook for hydrocarbons and petrochemicals is encouraging. Current supply dislocations in Nigeria and worries about Yemen and Iraq are coming on top of what is already a discernible firm trend in demand, led by the US.

More stable, higher prices, which have benefited upstream profits, will give downstream margins and earnings a solid boost from now on. Chemical prices are also firming and the geared effect on group profits of a cost base dollars 1bn lower will be powerful.

At 418.5p, up 7p, the shares have further to go despite a yield of less than 3 per cent and dramatic outperformance since mid-1993.

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