The Investment column: `30% BP' ends up red-faced

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The Independent Online
Sir David Simon, chairman of British Petroleum, is never short of a catchy phrase to describe the oil giant's results and yesterday was no exception. In ebullient mood he described 1996 as the "30 per cent year", since both profits and dividends were up by around that amount. Last year replacement cost profit, which excludes exceptionals, surged to pounds 2.62bn, with the fourth quarter dividend raised 15.25p to 19.5p.

Yet the reaction of the markets left BP's top brass looking more than a little red-faced. The shares ended 27p lower at 694p as dealers turned sour on the oil sector, thinking that the recent slide in oil prices back to more realistic levels had yet to hit sentiment. The talk from analysts was about "unrealistic optimism" being punctured, hardly what BP wanted to hear.

On the face of it, the figures seems to bear out this analysis. It was true that BP's fourth-quarter profits of pounds 689m were slightly below expectations, but this was because John Browne, chief executive, had included in the figures discretionary spending in the exploration and production businesses, including $40m on a new computer system. The 1p rise in the fourth-quarter dividend to 5.25p was also mildly disappointing with some analysts looking for 5.5p.

Yet, beneath it all, BP's core business seems as solid as ever, either outperforming other oil groups in terms of its return on capital, or at the very top of the industry's best performance. BP makes returns of 17 per cent on investment, whereas Shell, which reports tomorrow, is having trouble getting above 12 per cent.

Even the fall in oil prices is deceptive. All oil companies had a bumper year in 1996 as the price of oil unexpectedly rose to $25 a barrel. Though the price has dropped since the autumn to $21, BP's internal target is just $14, whereas long-term forecasts - always an unreliable guide in the oil business - see the price hovering at around $20 a barrel. Sir David was yesterday anxious to dampen expectations of another 30 per cent year in 1997. Yet all the indications are that BP's predictions will turn out to be far too pessimistic. Analysts are forecasting net income of pounds 2.94bn and earnings per share rising from 46.7p to 51.95p. On that basis, yesterday's share price fall could spell a good buying opportunity.