IT used to be said that there were only two certainties in life: death and taxes.
Now, it seems, a third - namely that an oil company will make massive profits - can be added.
It makes for a somewhat uncomfortable triumvirate of sureties if you're a motorist facing sky-high petrol prices. But it's a blessing if you're a shareh
older, which most of us are, albeit indirectly.
BP didn't just push the door open on the reporting season for oil companies with its £6 billion of half-year profit, the 29 per cent increase on the same period the year before effectively broke the door off its hinges.
So it's easy to see then why BP is sometimes referred to as "Bumper Profits".
But the figures still left one trader somewhat underwhelmed: "As much as the figures are good, they're not amazing."
Still, with Royal Dutch Shell (RDS), ExxonMobile and ConocoPhillips all due to announce fat profits before the end of the week, the creaking door-frame could be reduced to matchwood by Friday night. The figures relating to oil industry profits are staggering. According to a report earlier this year from Merrill Lynch, the world's 70 biggest oil groups are on course to report a total net income of almost £132.5bn for 2005 - which, if looked at on a profit-per second basis, works out at just under £7300, or about one-third of the UK average annual wage.
To put another perspective on that, the total is almost as much as the entire Polish economy, according to Bloomberg.
Tomorrow, RDS is expected to detail interim profits of about £3.1bn, while brokers at Credit Suisse First Boston see BP's main rival for the oil industry crown (based on revenues), ExxonMobile, weighing in with a hefty rise in half-year earnings to £4.6bn.
The question is: can the price of oil continue to rise and keep the black gold explorers dishing out healthy dividends?
Analysts are at odds about that. Goldman Sachs recently said that oil could see a "super spike", taking it to around $105 a barrel. But counterparts at Merrill Lynch have dismissed such talk, although they said last month that prices will remain above $50 because of refinery bottlenecks and the higher prices commanded by crude on the futures market.
"The oil markets are in a 'super contango' phase, in which crude oil contract prices for the front month are significantly below those of future months, reflecting a temporary supply surplus," Merrill says in one recent report.
But with demand from the likes of China and India helping to drink down current capacity while refineries struggle to keep pace with demand, it's generally accepted that prices will remain high in the short to medium term.
That can be seen from prices in the oil futures market, where the price of a barrel of oil for delivery in December 2009 is currently priced at around $40.
In March last year, a similar contract would only have cost about $27.
BP's chairman Lord Browne says: "We continue to say that oil prices in the medium term will be pretty strong.
"Whether they stay at this level remains to be seen because of the lack of production capacity and the lag, the time it takes to get that production ready for the market."
Yet over the longer term, the peer says he sees crude prices weakening to anywhere between $20 and $35 per barrel, as supply and demand get a closer balance. Over the course of 2004, the average price for a barrel of Brent crude was just $38.27, and that helped BP make a full-year profit of £8.7bn.
And while the price of a barrel is now below the recent peak of more than $60, the cost still averaged $51.63 over the second quarter, a period which BP, Europe's biggest oil firm, described as "generally stronger" than a year ago.
"We have said they will probably average around $40, but it's impossible to be very precise over the next few years.
"All I can say is that they will be higher, we expect, than the historical experience we had in the Nineties," notes Lord Browne.
While he accepts that the oil majors are raking in the cash, Lord Browne sought to defend his firm's bulging coffers.
"I remind people that these profits are distributed through dividends and stock buy-backs to our owners who are primarily pension funds, which is everybody."
The extent of enthusiasm from an investment point of view is easily seen in the 30 per cent rise in the FTSE oil and gas sector over the past year.
Individually, BP has seen its shares virtually double, while the FTSE-100 index has seen growth of about 25 per cent.
And with that in mind, BP's latest profit announcement came with news that the London-based firm would continue with its share buyback strategy in the second half of the year.
Lord Browne says the buyback will be "at least" $6bn (about £3.45bn) in the second half of 2005 "subject to market conditions and constraints".
However, he warns that it can't be taken for granted that BP's second half would be as profitable as the first half.
"The outlook for retail margins remains uncertain with continuing crude and product price volatility," he cautions. Rising product prices have dampened margins over the past few weeks and have contributed to a weak start to the third quarter," he adds.
However, as far as the City is concerned, BP is doing everything right, by taking its buyback for 2005 towards the £5.75bn mark.
"The cash is being returned to shareholders," says Nigel Bolton at Scottish Widows Investment Partnership. "It's positive," he adds.
BP will also increase the quarterly dividend to 5.12 pence, taking the half-year dividend hike to 25 per cent. Over the past three years, the firm has implemented a progressive dividend policy, and with its gearing level at just 18 per cent - below a 20-30 target range - there is room for more windfalls to shareholders.
However, to maintain the goodwill of the shareholders, if not necessarily the country's motorists, BP and its main UK rival RDS will have to keep on coming up with improving performance.
That can be partly achieved by a steady rise in production, although that will at least be temporarily offset by the current capacity limits on refining.
Over the last quarter, BP's oil and gas production averaged 4.11 million barrels a day - a 3.6 per cent increase from 3.97m a year earlier.
BUT year-on-year output growth has slowed from the 18 per cent gain in the second quarter of 2004, when the company reaped the rewards of growth in its Russian joint venture TNK-BP.
At the end of its last full-year, BP said its global production was expected to rise to about 5.1 million barrels a day by 2010.
BP's exploration and production arm has been the main beneficiary of the soaring oil price, with second-quarter profits increasing by 38 per cent, helped by new finds in places like Azerbaijan, Egypt, Angola and the Gulf of Mexico.
To help keep that momentum going, BP will have to invest further in its exploration and production capacity.
In fact, Lord Browne insists that his firm's "significant" investment programme over the past ten years is as much to do with the company's current success as strong oil prices. He says that over 2005, capital investment will be about £8.43bn, with a further £8.63bn the following year - each virtually the amount the firm made in profit last year.
Elissa Bayer of Gerrards stockbrokers says: "There has to be higher spending . . . they have always got to find new resources."
BP platform a lame horseWHILE BP needs to increase production to meet demand and appease investors, its chief executive Lord Browne has been forced to admit that his firm's Thunder Horse oil development is lagging behind schedule.
He says Thunder Horse, located in the Gulf of Mexico, 150 miles south-east of New Orleans, is "unlikely to be up and running" before the end of the year.
But he declines to estimate when the platform - found to be tilting by as much as 20 degrees after being battered on July 11 by Hurricane Dennis - will be pumping.
The construction has been levelled, but analysts believe production at the £575 million semi-submersible platform - the largest facility of its kind and due to pump 250,000 barrels of oil per day at full capacity - could be delayed by at least six months while the US Coast Guard completes an investigation. At full capacity, that would represent a loss approaching £6m a day for BP.
"By our third-quarter results, we should be in a better position to know when it will begin pumping," a spokesman for BP offers.
Ivor Pether, an analyst at Royal London Asset Management, says that until Thunder Horse comes on stream, it will be hard to estimate BP's growth this year.
