Lower oil prices and reduced margins put pressure on BP, but it remains a great income stock.
The Oily reporting season got under way on Tuesday, with fourth quarter and full-year results reported by BP (LSE: BP).
Profits down
Profits were expected to be lower this year than last, as the crude oil price has fallen a long way from the peak of $147 per barrel that it reached in 2008 -- the price is now only around half that. But full-year profits still came in a little below forecasts, having fallen 45% on a year ago, although in the final quarter profits were up 33% on last year.
Stated as replacement cost profits, the full year brought home profits of $14bn against $25.6bn the year before, with the fourth quarter turning a profit of $3.4bn against $2.6bn for the final quarter of 2008.
Chief executive Tony Hayward told us that the year had been very good, adding "These results provide the clearest demonstration of the progress we have made and the momentum we have established in growing our business and making it more efficient."
The annual dividend for 2009 was 56 cents, up a little on the 55.05 cents paid for 2008. Due to the weakness of the pound, the sterling equivalent for 2009 showed a considerable increase -- 36.4p vs 29.4p.
Production up
Though profits were down, the company told us that its oil and gas production increased by more than 4% during the year, and BP had "continued its industry-leading 17-year run of increasing reserves." That growth in production was ahead of the company's expected long-term rate of 1-2%, being boosted partly by new projects.
While profits may be down this year on the back of falling oil prices, the company's production ostensibly looks to be in good shape for any rising future demand, even if production in 2010 is expected to be a little below last year's due to the boost given by the absence of a significant 2009 hurricane season.
However, is that rising future demand really going to materialise, and what will its potential profit margins look like? Crucially, as well as absolute oil prices being lower, refining margins have been falling too.
Margins
The refining margin an oil company makes on its operations measures the difference between the price it can get for its refined products, and the cost of its crude oil. BP told us that in the final quarter of 2009 it achieved a refining margin of just $1.49 a barrel, compared with $5.20 a year previously. And, perhaps of more concern, the company expects refining margins to remain depressed for the foreseeable future.
The recession has certainly led to a reduction in demand (consumer demand in particular) for refined oil products -- petrol and diesel -- and that will have been responsible for some of the pressure behind the lowering of margins. Whether we are looking at a short-term fall in demand as a result of the continuing economic weakness that is still afflicting the globe, or whether there really has been a permanent reduction in consumer demand, remains to be seen.
But if the demand for oil and gas demand is going to be lower in the long term, I can't see demand in any other sectors really being much healthier. Conversely, if the world's economy gets back to long-term growth, as I think most of us expect it to do, it is hard to see how there could be a general increase in demand without an increase in demand for oil.
Buy the shares?
Before today's results announcement, analysts had been forecasting a BP dividend yield for 2010 of just over 6%, with EPS forecasts and the current share price (570p) giving us a P/E of about 9.3.
Even if 2010 profit forecasts are now revised downwards, I can't see the prospective P/E (on the current price) going much above 10. And any dividend over 5% will still make BP a good defensive stock, with potential growth to come if and when the economy starts to boost demand again and those refining margins improve.
So at the moment, I still think Big Oil is a good place for us to keep some of our money -- some of mine is there and it's staying there.
More from Alan Oscroft
> Alan owns shares in BP.
