BP surprised the market yesterday by announcing plans to use its massive cashflow to plug a $2bn (£1.25bn) hole in its pension funds.
The company reported second quarter results at the top end of expectations but some City analysts worried that the pension contribution would mean an end to its share buyback programme.
The oil and gas giant reported second-quarter net profits of $3.1bn, up 42 per cent on the period last year but down on the $3.7bn made in the first three months of 2003.
The second-quarter figure was driven by better oil and gas prices, compared with last year, and improved refining and marketing margins, together with a much better result in the petrochemicals division. Lord Browne of Madingley, the chief executive, said: "It's been a good second quarter and we see much of the positive environment continuing in the third quarter."
He added that trading conditions were helped by the fact that oil inventories were low and the progress of recovery in Iraqi production had turned out to be slower than many had predicted.
Mark Redway, an analyst at Canaccord Capital, said: "The results were good but the market is focusing on the pension deficit and the possibility that [share] buybacks are going to be suspended."
BP had only committed itself to $2bn of share buybacks in 2003, which was completed in the first half, though, given its strong cashflow, there was an expectation that it would continue.
Lord Browne did not rule out more buybacks this year but indicated that it would come below other priorities, including the pension situation.
The company spent $300m on tackling the deficit in its pension funds in the first half and it is likely to spend a further $2bn in the second half, to wipe out the deficit altogether.
"This would be a prudent and disciplined use of cash to fill-up this debt-like obligation," Lord Browne said.
The deficit is mostly in BP's pension funds in the US, as a result of the downturn in equities and a restructuring programme that has seen it lay off thousands of workers.
Peter Hitchens, an analyst at Crédit Agricole, said: "It's a boom time for BP. Everything is ticking along very nicely. In such good times, it's using cash to repair something that is very topical."
He estimated that BP had around $1bn of spare cash in the second half, which could be spent on buybacks or another Russian deal. BP said it was in negotiation to buy 25 per cent of Slavneft, which would cost around $1bn, according to market estimates. Lord Browne dismissed reports that the Russian government is unhappy about BP's $6.2bn deal to buy half of TNK, which is yet to be cleared by the authorities.
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