Jeremy Warner's Outlook: Chinese burn for BP's unstoppable oil gusher

Click to follow
The Independent Online

We've had Shell, we've had Exxon Mobil; yesterday it was BP's turn to step up to the podium and although the size of its profits put the company firmly in bronze medal position, it was a performance worthy of the gold.

We've had Shell, we've had Exxon Mobil; yesterday it was BP's turn to step up to the podium and although the size of its profits put the company firmly in bronze medal position, it was a performance worthy of the gold. Some $13.7bn was returned to shareholders in dividends and buy-backs last year, with a further $23bn promised for the next two. Since this is predicated on an average oil price of "only" $30 a barrel, there's a strong likelihood of a great deal more. At last year's rate of capital return, it would take only 16 years for BP to pay back its entire stock market capitalisation.

From where we stand now, there appear few clouds on BP's horizon, unless it be a windfall profits tax or a series of climate change initiatives that would both curtail fuel consumption and limit the search for new sources of supply. Neither seems particularly likely the way things are, and since the best hope the planet has got of putting the lid on consumption is for the oil price to rise higher still, even global warming seems to play straight into BP's pocket.

Despite an oil price which is way above its long-run average, BP's Lord Browne of Madingley remains wedded and glued to his $20 a barrel benchmark for all new development. So far this, in my view overly vigorous, discipline doesn't seem seriously to have damaged BP's ability to find and buy enough oil to replace the reserves it is using up. The truth is that BP doesn't as yet need to raise its benchmark, which means the higher the oil price goes, the more money there is to return to shareholders.

BP's reserve replacement ratio last year was 106 per cent, which compares to just 40-45 per cent for Shell. Even on the Securities & Exchange Commission's more exacting measure, the ratio is still a relatively healthy 89 per cent, against Shell's 30-40 per cent. Annual production is meanwhile expected to rise by more than 5 per cent over the next three years.

In the circumstances, the biggest mystery is why BP's share price isn't a good deal perkier than it is. One explanation is the technical reweighting going on within the FTSE 100, which is causing passive investors to switch out of BP into Shell, even though there can be little doubt which looks the better investment. Another is that nobody can yet quite believe the high oil price is here to stay. Investors, and indeed CEOs with their still stringent disciplines on new development, have been burnt too often before to think the cycle has been abolished for good.

Still, one sign that it might have been lies in a throwaway remark by Lord Browne at his namesake's Advanced Enterprise conference in London last week. Lord Browne is still three years away from retirement, but he already looks forward to the day when BP is run by someone of Chinese or Indian nationality. These are the world's two fastest growing areas of oil consumption. If the present rate of development persists, it is hard to see how production can anywhere near keep pace with demand.

Strategic challenge

Charles Allen, chief executive of ITV, may or may not be much of a broadcaster, but he certainly seems a dab hand at winning concessions from the regulator. To the astonishment of all, he managed to win approval for the ITV merger with minimum conditions. Now he's persuaded Ofcom to allow ITV to halve its commitment to non news, regional programming, with the eventual intention of reducing it to just half an hour a week after the digital switchover in 2012. Come June, he's hopeful of also securing a considerable reduction in the amount ITV pays the Treasury for its franchise licences.

The savings won yesterday are not huge - perhaps £10m out of public service broadcasting obligations estimated by ITV at some £250m a year. Yet also in Mr Allen's line of fire are commitments to religious, arts and children's programming, where the costs are a good deal higher. In an age of increased fragmentation for commercial TV, it becomes progressively harder to hold ITV to these obligations. Ofcom's broad brush view on this - that the BBC should remain the cornerstone of public service broadcasting, allowing ITV more freedom to pursue mass market, commercial audiences - very much fits with Mr Allen's own strategy for reviving the company's fortunes.

Not everyone agrees with Ofcom's approach. Ed Richards, the Ofcom executive who conducted the review and a former adviser on the media to No 10 Downing Street, is dismissed by some as an ignoramus who is presiding over a disastrous retreat from regional programming. Yet it is hard to see what the alternative is. ITV remains a relatively strong brand only because free-to-air, multi-channel TV is still in its infancy.

Never mind Freeview, broadband opens up a whole new spectrum of possibilities for broadcast TV. ITV's God Slot will find it harder and harder to compete for significant audience share in the brave new world we are about to enter. Much better that ITV makes its programming in the regions than that it makes bad programmes nobody wants to watch about the regions. Niche markets exist for this type of stuff; the beauty of digital and broadband TV is that it can now be delivered at low cost to those who want to watch it without having to force it on to the rest of us.

Mr Allen was lucky to have survived the disaster of ITV Digital and although he has since won plaudits in the City for steering the merger through the competition authorities and for the further regulatory concessions he is now winning, it will all count for nothing if he fails to defend and grow the top line. However much ITV manages to reduce costs, the growth of alternative media means the company remains challenged strategically. Mr Allen hopes to stave off the decline in market share that will inevitably occur in the core ITV1 brand by adding and promoting new channels, thus outdoing competitive fragmentation. For instance, the sequel to Footballers Wives, Extra Time, will be first aired exclusively on ITV2. The technique is already being used with mixed results on some of the BBC's digital channels.

Whether it will work is anyone's guess. Mr Allen appears to have survived the frying pan but he is not yet out of the fire.

Madness of crowds

It is a feature of global investment return year books - the latest of which was published yesterday by ABN Amro and the London Business School - that they tend only to confirm the blindingly obvious. Yet, filled with fascinating facts and figures, they are no less interesting for it. ABN Amro's chief "new" finding from analysing the long-term rates of return on equities in 17 national stock markets is that rapid economic growth is rarely accompanied by correspondingly impressive stock market performance.

So beware of all those climbing aboard the Chinese development story bandwagon by advertising the virtues of their Far Eastern funds. It just ain't true to think that an economy growing at a very rapid rate will see an equally rapid rise in profits, dividends and returns to investors. The study finds that long-term dividend growth is in fact below per capita economic growth in all countries, but this is particularly the case in fast-growing emerging markets.

There are two likely explanations for this. One is that as economies play catch up, it is only natural and fair that most of the spoils will go to previously deprived populations, not to those providing the capital. The other is that growth economies tend to attract an oversupply of capital, which means that returns fall correspondingly.

The study also confirms that this year's star sector is quite likely to be next year's worse performer, and visa versa. Another finding is that micro-stocks, accounting for less than 1 per cent of the market, tend as a group substantially to outperform small and large caps.

And then there's reconfirmation of the oldest truism of all. Equities over time will always hugely outperform other asset classes. Wait long enough and the massive deficits that are a current feature of our beleaguered pensions industry will disappear. Unfortunately the law now requires trustees to seek immediate means to plug the gap, which quite apart from damaging the profits of the sponsoring company, generally involves dumping cheaply priced equities for expensively priced bonds. Somewhere along the way we seem to have lost sight of common sense.

jeremy.warner@independent.co.uk

Comments