London-based BP plc Tuesday reported that net income nearly doubled in the third quarter on the back of soaring commodity prices. However, the major warned that its capital spending budget is taking a hit from higher oil field service costs and a weaker dollar, which may put a damper on spending in the next year.
Fiscally cautious with its increased bounty from higher oil and natural gas prices, BP took some of its windfall to begin a repurchase program of about $5.5 billion of its shares this year. However, that ambitious program may be threatened by some factors BP said it can’t control, including higher oil field service costs.
Citing “sector-specific inflationary pressure,” BP said costs are expected to remain high through 2005, which will boost this year’s capital spending for exploration and production (E&P) slightly and increase next year’s spending plans to $14 billion. BP had previously estimated next year’s spending at $12-12.5 billion.
Lord John Browne, CEO, said that “in the spring of this year, we began to see that the market prices for our capital goods were increasing quite strongly. The increased investment within the global E&P sector…led to a tightening in all our supply markets.
“As activity levels rose, unused capacity was absorbed. Also, steel prices began to rise significantly, adding further to the overall inflationary pressure in the sector. As a result, the market price for our mix of capital goods was rising at a rate of 10% a year. Our supply chain management has offset around half of this and we had expected in any event to offset 2% through normal activity. Overall, therefore, we are seeing a 3% increase in our capital costs this year above the level anticipated in our plans.”
Browne said that in addition, “our capital expenditure is not all made in dollars. When we had set our 2004 plan a year ago the dollar was rather stronger. So the impact of the weaker dollar has increased the dollar-based capital expenditure. All of this then explains why in August we increased our estimate of E&P capital expenditure from $9 billion to $9.5 billion for 2004; we now expect it to be just above this level.” BP now estimates that total capital expenditure in 2004 will be just above $14 billion.
“What does all this mean for E&P capital expenditure for 2005?” Browne asked. “It’s too early to be definitive, but we can make some assumptions to gauge the possible impact of the dollar and sector-specific inflation.” If there is more inflation, prices will rise. “So if the market price for our mix of capital goods continues to experience inflation of 10% a year; if we succeed in offsetting 2% of the price increase in line with our long-term track record; and if our supply chain management offsets another 2% — a lower amount than in 2004 because of the maturing of certain contracts — then the inflation we will actually experience between 2004 and 2005 would amount to around 6% or about $0.6 billion. In these circumstances, E&P capital expenditure would rise to $9.6 billion.”
Browne added that there also could be “greater than expected inflation in the prices of capital goods used in the customer-facing segments and their capital expenditure level will also be affected by the strength or weakness of the dollar. For the BP Group as a whole, all this means that capital expenditure is expected to be just above $14 billion in 2004 and could be around $14 billion in 2005. That is higher than we previously estimated.”
BP said 3Q2004 net income was $4.48 billion (21 cents/share), compared with $2.34 billion (11 cents) in 3Q2003. Revenue in the period was $73.85 billion, an increase of 25% from last year’s $59.16 billion. BP’s net income is reported under UK generally accepted accounting principles and is not comparable to the United States’ rules.
For the period, production rose 11% in the quarter to 3.9 MMboe/d, mostly from BP’s Russian joint venture, TNK-BP, and increases in other production regions. Gains were partially offset by declines from planned maintenance in the North Sea and Alaska, operational shutdowns in the Gulf of Mexico related to Hurricane Ivan and a blowout at operations in Egypt.
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