View from City Road: BP remains in troubled waters

THE MARKET is in danger of placing too high a value on British Petroleum's recovery potential. Expectations of its turnaround were already high when the company's 1992 results sent the shares 11p higher to 277p yesterday. So far this year, they have outperformed the market by about 6 per cent, but it is doubtful that BP can continue to stay ahead of the pack.

Despite an encouraging fourth-quarter performance, BP is still knee-deep in problems. The oil exploration and production business did well broadly to maintain its underlying operating profits at pounds 1.7bn. However, trading conditions in chemicals and oil refining/marketing remain grim. The former slipped into a pounds 24m loss and all signs are that the sector will continue to suffer because of overcapacity and gathering recession on the Continent. Wisely, BP has already decided to withdraw from peripheral chemicals sectors but, with some of its core petrochemicals also in dire straits, it may soon be forced to take further costly steps to make it viable.

Against a difficult industry background, the refining business managed to lift profits for two consecutive quarters last year. With the US economy also on the move there is room for optimism that the improving trend will continue. That said, the division is still generating a pathetic return and will take time to beat into shape.

Meanwhile, the group is facing a hard slog to reduce its borrowings, even though David Simon, BP's chief executive, reaffirmed a commitment to pay down BP's loans by pounds 700m a year.

It made a good start here - a two-year cash outflow was stemmed in the last quarter, reducing the year's drain from pounds 1.1bn to pounds 600m. Helped by an on-target disposal programme and reduced capital spending, BP also reduced its mostly dollar-linked debt by pounds 700m to pounds 10.8bn , but as luck would have it, a firming greenback actually pushed the group's gearing to 100 per cent in sterling terms.

In short, BP is not out of the woods and is in a poor position to withstand any collapse in crude prices. Its problems could also restrict its ability to lift the 2.1p quarterly payout for two years. With the shares yielding less than the market average, they are not attractive.