BP rolls out the barrels, but at what price?

Medisys; Jennings Bros
Click to follow
The Independent Online

The oil price may have plunged by a third since the terrorist attacks of 11 September, but BP continues to roll out the barrels. The UK's biggest and most profitable company, and the third-largest oil group in the world, reckons it is still as good a time as any to increase its market share.

Lord Browne, the recently ennobled chief executive, yesterday brushed off suggestions that slumping demand for oil should prompt a change to the company's ambitious target of 5 to 7 per cent annual production growth. BP is finding the going tough in several areas at the moment, but meeting that target doesn't look like one of them, since its existing oil fields have plenty of capacity. With most of the world's oil production in state hands, BP's share is just 3 per cent and the planned increases should boost earnings very nicely.

The chemicals business continues to prove BP's main headache, with operating profits in the third quarter 58 per cent lower than the previous year. The unit is suffering twice over, from overcapacity and now also from the slump in demand from industry. It has spent $67m (£46m) on restructuring, including shutting down two UK factories, but Lord Browne is warning investors to expect a few more tough quarters. The unit is small in the overall context of the group.

The central issue for BP, as highlighted by the third-quarter results, is the direction of the oil price. Group profits for the three months to 30 September were $3.05bn, down 20 per cent on the same period a year ago, almost entirely because the oil price has fallen 17 per cent since then. And it is getting worse. BP made an average $23.08 a barrel for its oil in Q3; yesterday the price of Brent crude was below $19.

Lord Browne, like investors, have to sit and wait to see whether the Opec cartel of oil producing nations will cut production and manage to bring the oil price back into its target range of $22 to $28 a barrel. Analysts still believe that can be achieved, despite evidence that Opec members are busting their production quotas. The consequences of failure could be seriously damaging to oil prices – and to BP. Its internal budgeting and decision-making on exploration and production projects are based on what previously looked liked an ultra-conservative oil price assumption of $16. If demand stays low and crude falls substantially below that figure, all bets on future earnings are off.

So while BP shares, 18.5p lower at 541.5p yesterday, trade at a justified premium to Shell – who abandoned its more modest production growth targets earlier this year – the risks are high and the market is out of love with oil stocks. There will be a better time to buy.


Medisys took City analysts on a jolly to Singapore yesterday, giving them a look at the new factory where it will be producing 130 million syringes with whizzy retractable needles.

The company said it was ready to start high-volume production this month, and the shares have been ticking up as the marketing launch of the product approaches. Safety syringes are exciting stuff, and Medisys will be one of only three companies with products on the market. Legislation that came into force in the US in the summer requires hospitals to look at replacing old-style syringes with the new products, so as to reduce the chance of staff pricking themselves and risking infection. The threat of staff suing should make the transition to safety syringes a speedy one and demand is set to outstrip supply.

Medisys is able to produce syringes for under 10 cents, sell them for 20c and still undercut rivals – which include cash-strapped NMT – by a half.

Investors will be keeping their fingers crossed that there are no hiccups, like the manufacturing problems that have dogged NMT. Another worry: NMT complained that sales were being hampered because it only had a 3ml syringe available, while hospitals wanted a range. Medisys, which only has a 3ml product, says it has seen no sign of that attitude among its potential customers.

A strong business supplying glucose tests for diabetes patients, and a cash pile of £8m, limits the downside for loss-making Medisys. Analysts expect break-even next year, but the shares will be news-driven for some time yet. Up 4.5p to 70p yesterday, they are half previous highs and worth a punt.

Jennings Bros

It has been grim up north-east. Jennings Brothers, the Cumbrian pubs operator and brewer, has suffered as foot and mouth kept walkers away from the Lake District and beer drinkers out of its pubs, half of which are in rural areas.

Yet dire though Jennings' interim results yesterday were – profit before tax for the half-year to 1 September dived to £576,000 from £1.5m on sales down 7 per cent to £15.8m – there is light ahead.

Jennings plans to pull out of managed pubs by next summer. Managed pubs – run by brewery staff – carry higher risk than tenanted pubs, where the brewer lets his building to a publican who then stocks his beers. Jennings simply couldn't compete with such behemoths of the trade as Punch Taverns with a managed estate of 2,000 sites. The Lakeland brewer will sell 22 of its 44 managed pubs and transfer the rest to tenancy. With the £16m it nets from the disposals, Jennings can cut its worrying debts and concentrate on upping sales of its Cocker Hoop ale.

The shares, off 10p at 164.5p, trade on 10 times 2003 earnings and yield 4 per cent. That's not unattractive and there is always the chance of a bid from elsewhere in the consolidating pubs industry. Worth watching.