BP’s not having much luck at the moment.
Europe’s largest oil company saw production fall for the fourth quarter in a row during the past three months, down 2.5% on last year.
It’s had a series of problems in the States, including a charge that it illegally cornered part of the US propane market in early 2004, forcing up prices for rural consumers.
And while the continued high oil price is good for profit margins it also makes it more tempting for tinpot governments, like Venezuela, to try to get more of the companies’ wealth.
And it still can’t find anywhere interesting to invest all that cash it’s generating…
BP produced 4.01m barrels a day of oil and gas in the second quarter. That was 2.5% down from 4.112m barrels a year earlier.
Problems in Venezuela were partly to blame. Under Hugo Chavez, the country is forcing foreign oil companies to sign over more of their production to the state-owned oil firm Petroleos de Venezuela. ‘It is believed that BP was forced to give up about two-thirds of the oil the fields were producing,’ said the Independent.
Meanwhile the group took a further charge of $500m related to litigation over its Texas City refinery explosion. The group had already put aside $700m for the March 2005 blast, which killed 15 people and injured 180.
But while production fell, the company’s profits made for happier reading. Earnings are set to be ahead of 2005, amid strong oil prices and rising refinery profit margins. Margins on refining have risen from around $8.50 a barrel in the second quarter of 2005 to more than $12.60 a barrel this year.
However, some analysts are becoming impatient with the company’s hefty spending on share buybacks. BP bought back $4.5bn worth of shares in the second quarter of 2006.
“It’s a shame to see such a great company not finding opportunity to invest,” said Stefan Duchateau of KBC Asset Management.
Recent rumours had suggested that BP might buy into Russian peer Rosneft when it floats later this month. But Reuters reports that it’s unlikely. “The move lacks strategic appeal and carries too much reputational risk”, said ‘sources close to the situation’.
We think BP has probably got it right on this one. Rosneft, Russia’s third-largest oil producer, is set to have a market value of between $60bn and $80bn. But that’s more than the country’s second-largest oil producer, Lukoil. We mentioned why Rosneft doesn’t seem like good value to us last week – you can find out why, if you missed it, by clicking here: Is Rosneft too risky to invest in – or just too expensive?
Perhaps BP should look to the world’s second-largest medical charity, the Wellcome Trust, for ideas on what to do with its money. Wellcome is about to raise £300m to £500m via a bond issue.
Why would a charity sitting on £12bn need to raise money from the City? The answer of course, is that it doesn’t. Wellcome intends to invest the proceeds in the financial markets – the first UK bond issuer to do so.
It’s less risky than it sounds. The Wellcome trust has been given a AAA credit rating by credit agencies. This is the highest available rating – which means that the 30-year bond won’t have to pay out much to remain attractive to investors.
Wellcome will be able to borrow the money at less than 5% a year. The charity’s fund managers have managed to return around 10% a year over the past 10 years. So as long as Wellcome’s stockpickers can keep up the good work, it should make a decent return on its investment.
Of course, past performance is no guide to future gains. And with stock markets across the world still wary after the turmoil of May and June, Wellcome’s innovative idea may yet turn out to be “just too clever by half”, as Robert Cole in The Times puts it.
Borrowing money to speculate on the stock market certainly seems like the type of thing you’d expect a hedge fund to be doing, rather than a charity.
So it comes as no surprise to learn that Wellcome’s chief investment officer Danny Truell used to work for US investment bank Goldman Sachs.
A running joke on Wall Street is that if you want to invest in a hedge fund, you should buy shares in Goldman. The investment bank has benefited from its love of financial innovation in recent years. But all those risky derivatives leave it looking very exposed when market volatility rises and global liquidity retreats, as in recent months.
Subscribers can read more about Goldman Sachs, and why MoneyWeek reckons time has come for investors to sell out of the investment bank, by clicking here to view this week’s issue: Latest issue.
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Turning to the wider markets…
The FTSE 100 ended higher, up 36 points at 5,868 on Monday. Mortgage bank Northern Rock was the main riser, gaining 4% to £10.40 on hopes of a possible merger with mid-cap peer Bradford & Bingley. For a full market report, see: London market close
Over in continental Europe, the Paris Cac 40 gained 14 points to 4,980, while the German Dax jumped 29 to close at 5,712.
Across the Atlantic, US stocks rallied, as unexpectedly weak manufacturing and construction data suggested interest rate hikes may be nearing an end. The Dow Jones Industrial Average rose 77 to 11,228, while the S&P 500 closed 10 points higher at 1,280. The tech-heavy Nasdaq gained 18 to 2,190.
In Asia, stocks advanced. The Nikkei 225 gained 66 points to 15,638 on hopes that the Federal Reserve may not raise interest rates next month.
This morning, oil was little changed in New York, trading at around $73.95 a barrel. Brent crude was also flat, trading at around $73.20.
Meanwhile, spot gold was higher, trading at $620.60 an ounce. Silver was flat, trading at around $11.17 an ounce.
And in the UK this morning, leisure group Rank has said it may sell its Hard Rock restaurants and hotels unit to focus on it UK gaming business.
And our two recommended articles for today…
Will the bear market return this year?
– Stock market volatility is soaring. The US consumer is still spending the country into a crisis. And Japan is sucking liquidity out of the global economy. All of these factors suggest that the bear market could easily make a comeback this year, say Andrew Selsby and John Robson of RH Asset Management. To find out how bad it could be, click here: Will the bear market return this year?
Get exposure to Asia – buy uranium
– Asian markets have not been kind to investors this summer – but the long-term case for Asian growth remains strong, says MoneyWeek editor Merryn Somerset Webb. Strong growth means rising demand for energy. With most of Asia reliant on imported energy, the region is looking for ways to become more self-sufficient – and that means going nuclear. To find out how you can take advantage of this trend, click here: Get exposure to Asia – buy uranium