More than compensating for the company’s poor refining results, BP’s Exploration and Production (E&P) segment boosted net income to $651 million for the fourth quarter, compared to a loss of $603 million in the year earlier quarter. For full-year 2002, net income increased to $6.85 billion from $6.56 billion in 2001. Sales on the year increased to $202.5 billion from $200 billion.

Looking ahead, BP said it has set out plans to spend more than $20 billion over the next five years on five new global profit centers — including the deepwater Gulf of Mexico and Trinidad — which would more than offset decline in mature provinces such as the UK North Sea.

The company noted that the fourth quarter trading environment was more favorable than a year ago for its E&P segment with higher oil and gas realizations, though less favorable for the Refining and Marketing unit, where adverse crude price differentials depressed BP’s refining margins relative to the industry marker. For full year 2002, BP said the trading environment reflected significantly less favourable gas prices and refining margins.

BP also reported that it had replaced 175% of the oil and gas it produced in 2002, the tenth year in a row it had replenished reserves by more than its annual output through successful exploration. The company added that it has determined to repurchase $2 billion of its own shares, subject to market conditions.

“The year’s trading environment showed significant deterioration, with gas prices lower and refining margins depressed,” said BP Group CEO Lord Browne. “The effect of this was partly offset by underlying performance improvements. Our reserve replacement ratio places us in a strong position for the future. The net debt ratio was 28%, below the mid-point of our target range. The decision to repurchase shares reflects our confidence in our present financial condition and future cash flows, and our desire to give shareholders increased cash returns as the situation warrants.”

E&P’s contribution to pro forma results for the fourth quarter, adjusted for special items, was $3,666 million, up $1,292 million from a year ago. BP said the special items for the quarter were $94 million for the write-off of its gas to liquids demonstration plant in Alaska and $5 million restructuring charges.

The result for the quarter benefited from higher average liquids realizations, up $7.06 on a year ago. Average natural gas realizations increased by $0.59/Mcf compared with the fourth quarter of 2001. “North American natural gas realizations have improved reflecting the strong North American gas market,” the company said.

BP noted that fourth quarter production of 3,590 mboe/d was a record and benefited from seven new field start-ups. However, the increased production was partly offset by the effects of Gulf of Mexico hurricanes, shut-ins in Venezuela and an earthquake in Alaska. The full year result reflects production growth of 4.5% for liquids and 0.9% for gas, a 6% decrease in unit lifting costs and slightly higher liquids realizations, which were more than offset by significantly lower natural gas realizations.

BP’s Gas, Power and Renewables posted pro forma results for the fourth quarter of $72 million, compared with $102 million a year ago and $87 million during the third quarter. The year’s result, after adjusting for special items, was $384 million compared to $488 million for 2001. Fourth quarter results plunged from the prior year due to the absence of contributions from BP’s Ruhrgas business, partly offset by higher volumes and margins in marketing and trading. The sale of the Ruhrgas shareholding was effective Aug. 1, 2002. Full year results were also down due to a lower contribution from Ruhrgas and a weaker marketing and trading environment, partly offset by better performance in the natural gas liquids business and increased gas sales volumes, up by 15%.

BP’s Refining and Marketing segment came in with fourth quarter pro forma results adjusted for special items of $587 million, a decrease of $198 million on the same period last year. The special items include $261 million Veba Oil integration costs, $116 million restructuring costs, a $35 million write-down of retail assets in Venezuela and $8 million costs associated with the Olympic pipeline incident. BP acquired Veba in April 2002.

The company said the lower results were primarily due to lower U.S. retail and U.S. West Coast refining margins, which more than offset the contribution from Veba.

On the same day it posted earnings, BP also announced it has teamed with the Alfa Group and Access-Renova (AAR) to combine their interests in Russia to create the country’s third biggest oil and gas business, in which they will each have a 50% stake. BP said the new company will incorporate TNK and Sidanco which, between them, produce approximately 1.2 million b/d of oil. BP said it plans to invest $6.75 billion into the venture.

Browne said the company’s five new profit centers — the deepwater Gulf of Mexico, Trinidad, Angola, Azerbaijan and Asia Pacific LNG — were as significant in scale, capital and reserves for BP’s future as had been its development of the North Sea and Alaska some 30 years ago.

He added that the five centers would absorb some 50% of likely annual spending by the E&P segment between now and 2007. BP estimated that, of a group total of $14.2 billion, upstream capital spending would be around $10 billion this year, falling away to some $9 billion annually after 2004. Investment in a sixth profit center, BP’s 50% stake in the new Russian business, should be self-financing. Browne noted that capital expenditure for 2002 was $13.5 billion, excluding acquisitions, and is projected to be in the range of $14-14.5 billion in 2003.

Before taking into account the impact of sales or acquisitions made after January 1, BP said oil and gas production capacity would have stayed flat or grown modestly by up to 3% this year. The company also believed that production capacity would have risen on average by 3-4% a year from 2000 to 2005, and around 5% a year from 2003-2007.

“I would stress these are estimates of capacity, not targets for production from that capacity,” Browne said. “Growth rates will vary from year to year. Production volumes can be a useful indicator of growth, but they are only really useful when combined with a balanced view of all the other factors which go to create value.”

Assuming a $16 oil price and a gas price of $2.70/Mcf — BP expects return on capital employed for the group overall to be broadly flat over the next three years.

Browne said he expected divestments to continue at the rate of $3-$6 billion in 2003 — within BP’s recent historic range — and for debt to be maintained within the band of around 25-35%.

In announcing that the company will no longer give precise earnings, return and production targets, Browne said, “Reality is different — as current circumstances are reminding us — and that’s why we’ve moved from single-point targets, whether for production, return on capital or anything else, because such targets can distort the implementation of strategy. We’ve moved instead to using indicative ranges. We believe that it is a more transparent way of demonstrating how we actually manage the business. Taken together in a balanced way, those ranges are indicators of progress and they capture the next phase of performance improvement. I hope we have conveyed some sense of how excited we are about this phase, and of how confident we are that it will continue to deliver a leading level of performance.”

Summing up the company’s outlook, Browne said, “The world economy slowed during the fourth quarter with weaker growth in both the USA and much of Continental Europe. Evidence of sustained recovery is limited and confidence fragile.”

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