View from City Road: BP finds answers to the sceptics' questions
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Your support makes all the difference.British Petroleum's results for the first three months of this year go a long way to answering some of the sceptics' questions raised at the time of Bob Horton's departure in June. Profits rose for the third consecutive quarter, demonstrating both its improved cost control and recovery prospects.
Replacement cost operating profits rose from pounds 423m to pounds 585m year- on-year and were also higher than in the last quarter of 1992. With each of BP's core divisions moving in the right direction, the overall result was better than investors had expected, and sent the shares 10p higher to 306p yesterday.
The target is to reduce the group's cost base by about dollars 1bn a year, and David Simon, the chief executive, believes BP is now about half way to achieving that aim - a faster rate of progress than the group set itself last year.
That said, the company still has some protracted problems to tackle, beginning with the loss-making chemicals division. Though sustained cutbacks have hauled it up the performance league in the European petrochemicals industry, the division is likely to produce a woefully inadequate return for some time, due to chronic overcapacity. Here the best BP can hope for is to contain the losses in the hope that the division will generate bumper profits whenever the cycle turns.
The group's debts will also stay uncomfortably high despite a pounds 600m net cash inflow during the first quarter, which lowered net borrowings to pounds 9.6bn. On current trends BP should manage to pay down debt by its stated target of dollars 1bn a year, but there is still an outside chance that it may call on shareholders for cash some time within the next 12 months.
However, with the group heading for a net profit of about pounds 1bn this year, the shares are set to continue to outperform the market. One factor is that UK shareholders are underweight in both BP and the sector and are loathe to miss out on an earnings recovery. BP is still yielding less than Shell, but both companies are likely to beat the market over the next two years. Buy BP for recovery and Shell for its long-term value.
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