Fergus MacLeod - Head of IR
Tony Hayward - Group Chief Executive
Byron Grote - CFO
Andy Inglis - Head of Exploration & Production
Iain Conn - Head of Refining & Marketing
Mark Bloomfield - Citigroup
Alastair Syme - Nomura
Theepan Jothilingam - Morgan Stanley
Jonathan Rigby - UBS
Robert Kessler - Simmons & Company
Irene Himona - Exane
Neil McMohan - Sanford Bernstein
Joe Tovey - Tovey & Company
Colin Smith - ICAP
Paul Spedding - HSBC
Mark Gilman - The Benchmark Company
Lucy Haskins - Barclays Capital
Sergio Molisani - UniCredit
Pavel Molchanov - Raymond James
Neill Morton - MFG
BP plc (BP) Q4 2009 Earnings Call February 2, 2010 9:00 AM ET
Welcome to the BP presentation to The Financial Community webcast and conference call. I'll now hand over to Fergus MacLeod, Head of Investor Relations.
Welcome to BP's fourth quarter 2009 results conference call. I'm Fergus MacLeod, BP's Head of Investor Relations, and joining me today are Tony Hayward, our Group Chief Executive; Byron Grote, our Chief Financial Officer; Andy Inglis Head of Exploration and Production and Iain Conn, Head of Refining and Marketing.
Before we start, I'd like you to take a moment to read this next slide. As usual during today's presentation, we will be making forward-looking statements. As ever actual results may differ from these plans or forecasts for a number of reasons, such as those noted on the slide, and in our SEC filings. I'd also like to remind you that we're holding our Annual Strategy Presentation on March 2. More detail on some subjects such as reserves replacement and capital spending plans will be covered then.
Thank you, and now over to Tony.
Thank you, Fergus. Ladies and gentlemen, welcome to BP's fourth quarter results for 2009. Before I hand over to Byron to take you through our 4Q results in more detail, I'd like to spend a few moments reviewing what was a very good year for BP.
Let me begin with our 2009 full-year financial results. Headline replacement cost profit was $14 billion equivalent to $0.745 per ordinary shares down 45% in 2008 due to the much weaker environment. Post-tax operating cash flow was $27.7 billion. Our organic capital expenditure was $20 billion, and we divested around $2.7 billion of non-core assets.
Total 2009 dividends paid were $0.56 per share at 2% in dollars and 24% in sterling versus 2008. This means we distributed to shareholders $10.5 billion, despite the overall weak trading environment our financial condition remains robust with gearing ending the year at 20% at the bottom of that target range of 20% to 30%.
Before I talk about the operational and strategic progress that we made during 2009, I would like to summarize our performance against the expectations we set out a year ago. This highlights the momentum we are seeing in growing our business and making it more efficient. In exploration and production, we increased production by more than 4% in 2009 well ahead of our expected sustainable long-term growth rate of 1% to 2%.
In refining and marketing, we increased refining availability by around 5%, the restoration of our refineries is now largely complete and they are approaching full operating capability. On efficiency and cost we did better than we had expected. We exceeded our initial cash cost production objected by more than two fold with 2009 cash cost down by more than $4 billion year-on-year.
With that total approximately 60% was a consequence of direct interventions by the company with remainder related foreign exchange benefits and lower fuel costs. We maintained capital spending inline with guidance was benefiting from the improving efficiency of this spend. And finally, we achieved our targeted level of divestments to improve the quality of that portfolio. I am pleased with the track record we are establishing of delivering on our promises to shareholders and at the same time, I am conscious there is a lot more for us to do.
Let me now look at the strategic delivery from each of our businesses in 2009. In exploration and production we have continued to see very strong strategic as well as operational and financial momentum. In 2009, we were successful in accessing substantial new resource opportunities including a major new entry into Iraq with Rumaila field, one of the great oil fields of the world.
In Indonesia, we obtained the rights to develop coal bed methane in the Sanga-Sanga PSC through a VICO joint venture and subject to government's approval we added acreage in West Papua close to the Tangguh LNG facility. In Jordan, we are joining with a state-owned national petroleum company to exploit the onshore Risha gas concession. We also strengthened our exploration portfolio in several of our core areas by adding acreage in the deepwater Gulf of Mexico and in the Nile Delta of Egypt. And in Azerbaijan, we signed a memorandum of understanding with SOCAR to jointly explore and develop the Shafag and Asiman structures in the Caspian Sea.
Our industry leading track record of exploration success continue including the Tiber discovery, a giant field in Gulf of Mexico which along with further appraisal success on Mad Dog South helps to underpin the potential for continued growth in the deepwater Gulf of Mexico. We had further good news in deepwater Angola with the 17th, 18th and 19th discoveries on Block 31. Conversion of past exploration success into production continues with a startup of 7 major projects. Tangguh LNG in Indonesia, Dorado, Kingsouth and Atlantis Phase 2 in the Gulf of Mexico and Savonette in Trinidad and in TNK-BP we saw the startup of Uvat and Kamennoye. The pipeline of future projects was increased with the final investment decision on a number of new developments including Block 15 Clochas Mavacola in Angola and the (inaudible) Newfield developments in Trinidad.
In addition, strong performance from the first well in the second phase of Atlantis has given us confidence to make a final investment decision on further development this year and last but by no means least, I am pleased to report that we achieved a resource replacement ratio of more than 250% and a reported reserve replacement ratio of 129% in 2009 continuing at industry leading track record of better than 100% reserve replacement ratio over the last 17 years.
Turning now to the downstream business, we've made significant progress in the planned turnaround of the business on all levels. With improvements in safety, operational and underlying financial performance or bit in the face of a dramatically weaker industry environment with refining margins in the fourth quarter at the lowest level for almost 15 years.
Starting with safe and reliable operations which remains our top priority, all of our operated refineries are major petrochemical plants are now on a group-wide operating management system. We've restored missing revenues through a significant improvement in our operational performance. Our Solomon availability for the year was 93.6, the highest level since 2004. We have established new regional business service centers in Budapest, Kuala Lumpur and Chicago which will carry our finance, customer service and procurement activities more efficiently and we've made good progress on business simplification including completing the sale of a Greek ground fuels marketing business, reducing our geographic footprint in the international businesses and franchising our U.S. convenience retail.
Over the last two years, we've reduced our refining and marketing headcount by more than 4,500 excluding retail staff. Coupled with other cost efficiency initiatives, this has reduced 2009 cash costs in refining and marketing by more than 15%.
In Alternative Energy we're now focused on four key areas, biofuels, wind in the U.S., lower cost solar manufacturing and two major carbon capture and sequestration projects in Abu Dhabi and California.
Our forward agenda has been focused around corporate efficiency where we have exceeded our original objectives having reduced the total BP non retail headcounts since December 2007 by around 7,500 and permanent contractors by more than 1,500. In addition, we've reduced senior executive roles from 650 to fewer than 500. In parallel across the business we've continued our focus on deepening expertise.
Over the last two years almost 22,000 people have left BP and over 14,000 have joined, accelerating the process of change within the company. We will continue to drive greater efficiencies in to the business to ensure that we really do make every dollar count. Now over to Byron, who'll go through the 4Q results in more detail.
Thank you, Tony and good day to those joining us on this call. I will begin my review with a summary of the trading environment. The table shows the percentage year-on-year changes and BP's average upstream realizations and the refining indicator margin for both the fourth quarter and the full year.
In the fourth quarter the group delivered strong operational performance against the mixed market environment. Our liquid realizations increased by 8% compared with the third quarter rising to $68 per barrel, over 30% higher than 4Q '08.
Our 4Q gas realizations increased to $3.68 per 1000 cubic feet, over 30% higher than the previous quarter, but almost 30% lower than a year ago. Taking both oil and gas together, our total average hydrocarbon realization was up 12% compared with 4Q '08.
Refining margins remain very weak with global industry refining utilization in 4Q running around 80%. A refining indicator margin of $1.49 per barrel in 4Q was over 70% lower than a year ago.
Turning to the financials; adjusting for the charges of $940 million for non-operating items in fair value accounting effects, our fourth quarter underline replacement cost profit was $4.4 billion, an increase of 70% on 4Q '08. The higher result benefited from production growth, strong operational performance, and reductions in cash cost. The underline replacement cost profit included a negative consolidation adjustment of $500 million reflecting higher volumes of equity barrels in our downstream inventories at year-end coupled with higher prices.
As in the past, this volume impact is likely to reverse out in future quarters. Non-operating items included a $1.6 billion write-down of goodwill in refining and marketing related to our U.S. West Coast fuels value chain. Adjusting for the impact of this goodwill impairment which is not tax deductible, the effective tax rate in the fourth quarter was 27% and for the full-year was 31%.
Fourth quarter operating cash flow was $7.3 billion, up nearly 30% compared with the same period in 2008. The $0.14 per share dividend announced today, which will be paid in March is the same as a year ago.
We also announced today that subject to shareholder approval at the annual general meeting on the 15th of April, we will be replacing our current dividend reinvestment programs with an optional script dividend. We believe that for those shareholders who choose to take their dividend and shares rather than cash, the issuing of script is a more attractive alternative. Any cash freed up by this change, will provide the company with additional financial flexibility.
In exploration and production after adjusting for a gain of $1.4 billion for non-operating items and fair value accounting effects, we reported a pre-tax underlying replacement cost profit of $7.1 billion for 4Q, up $2.8 billion compared with last year, reflecting both higher oil prices and stronger operational performance.
Production exceeded 4 million barrels of oil equivalent per day, 3% higher than a year ago. In addition, the fourth quarter production benefited from the makeup of a prior period under lift of around 40,000 barrels per day.
We maintained momentum in reducing costs. Full year unit production cost was 12% lower than 2008. DD&A was higher than a year ago, in line with previous guidance. BP's share of TNK-BP net income was $540 million for the quarter, and we received the dividend of $940 million.
In refining and marketing, after adjusting for charges of $2 billion for non-operating items and fair value accounting effects, we reported a pre-tax underlying replacement cost profit of $15 million for the fourth quarter. This is a decrease of $630 million compared with the same quarter of 2008, primarily due to the extremely weak refining environment.
Rising crude prices and reduced volatility, also compressed marketing margins and lead to a weaker supply and trading contribution. Our operational performance however, continued to strengthen, with Solomon availability increasing still further. Cost continued to track well below 2008 levels.
Looking ahead to the first quarter, we expect refining margins to remain weak. In other businesses and corporate, after adjusting for a loss of $65 million for non-operating items, the fourth quarters result was a charge of $330 million, a $50 million improvement on a year-ago. This year-on-year improvement was primarily due to favorable foreign exchange effects and lower cost, partially offset by a much weaker margin environment for shipping and Solar.
Turning now to cash flow, this slide compares our sources and uses of cash in 2008 and 2009. At the start of 2009, we indicated our intention to balance our sources and uses of cash in an [all] prices environment of around $60 per barrel. We have essentially achieved this aim during 2009, despite much weaker than expected refining margins in North American gas prices.
Our net debt ratio was 20% at the end of 4Q, 1% lower than a year ago. This reflects the numerous steps we took to improve business performance and enhance cash delivery in the phase of the weaker environment we experienced in 2009.
I will now turn to specific guidance for 2010. Production growth was very strong in 2009. It benefited by about 40,000 barrels per day on an annual basis from the combination of the absence of the significant hurricane season and the under lift make up I mentioned earlier.
As a result, we expect production in 2010 to be slightly lower. Our longer-term guidance is unchanged and indeed our confidence in the longer-term has been reinforced by our successes in exploration and access in 2009. We will talk more about this in our strategy update next month.
Building on the significant reductions we achieved in 2009, cash-costs are expected to fall further as the benefits of our actions continue to feed in to the bottom-line. In the current environment, we expect to face adverse year-on-year foreign exchange and energy cost effects which would be an offset to our underlying progress in 2010.
We expect our organic capital expenditure to be around $20 billion, including an increasing growth component as the efficiency of our spin continues to improve. DD&A is expected to increase by around $500 million in 2010, a smaller increase than in 2009.
Divestment proceeds are expected to be between $2 billion and $3 billion, similar to 2009. We expect an underlying average quarterly charge of $400 million from other business and corporate cost in 2010. This is likely as in previous years to remain volatile on an individual quarterly basis.
The effective tax rate for the year is likely to be slightly higher, in the range of 33% to 34%, due to a slightly lower expected proportion of income from associates and jointly controlled entities, which as you remember are included net of tax. That concludes my remarks, now back to Tony.
Thank you, Byron. Before I conclude with a summary of our strategy, let me say few words on the environment as we move into 2010. In the major economies of the US and Europe, we expect recovery from the recession to be slow and gradual. The old markets look well supported biopic, but we expect gas markets to remain volatile.
Demand for petrochemicals products is recovering only slowly on the significant refining overcapacity, particularly in the Atlantic basin. As a consequence refining margins are likely to remain depressed for the foreseeable future.
Let me close by summarizing our strategy. It hasn’t changed, in the upstream we remain focused on delivering profitable growth. As Byron has already said, after a very strong year in 2009, we expect reported production in 2010 to be slightly lower.
This expected level of 2010 production is in line with the guidance we gave in our strategy update in March of last year. Growth is expected to resume in 2011 and the longer term guidance is unchanged. Costs are expected to come down and capital efficiency to go up. In the downstream, operational momentum has been restored and we are continuing to drive cost efficiency. In alternative energy, we focused on four key areas and have a disciplined investment framework. And we are continuing to drive efficiency at the corporate centre.
In closing, 2009 has been one of the best years for BP and its shareholders since the merger with Amoco. But we are not resting on our laurels in an environment that remains challenging and volatile, particularly in the downstream there is a lot more to do. Thank you for listening. The team and I would now be delighted to take your questions.
Let's begin with going to Mark Bloomfield at Citigroup.
Mark Bloomfield - Citigroup
Just a quick question on the cash flow completing your priorities there, clearly gearing stands right to the bottom of your gearing range and in 4Q, you generated over $1 billion of free cash flow, predisposables, which I guess suggest several other thing [based] from macro environment, you could say well beneath 20% coming into the end of 2010. I just wondered if it's still your intention that if excess free cash flow would be used to delever the balance sheet up 20% or do you think we should expect to return to distribution of excess free cash flow or indeed you think you got the optionality in your CapEx program to significant increased activity?
The short answer to your question is, Mark it is all too early. We remain very cautious on the overall trading environment. We wanted to demonstrate that the momentum we've delivered in 2009 is sustainable, and as I said we're not so sure about how the environment is going to pan out. We've been very clear about our financial framework over the years, and it remains intact. Clearly if the world looks a lot better, and we're delivering significant free cash flow then we always have the opportunity to return it to shareholders.
Let's go now to Alastair Syme at Nomura.
Alastair Syme - Nomura
I will just ask about the reserve replacement figure, it’s too early because too much granularity, but I don’t recall a lot of big sanctions in 2009. So maybe just to feel a sense of where the big components will come from?
Well, it's across the portfolio, Alastair. Andy will go into much more detail on this in early March, but it is reflection I think of the progress we are making of adding reserves across the portfolio. I wouldn’t actually highlight anything in particular it's across the board. The only thing I would say is that BP on its own was also well over a 100%. So it's not like it’s a TNK-BP phenomenon. Its broad based and Andy will go through the details in a month's time.
In terms of the SEC rule changes, there was sort of no contribution from that. So, it is actually around the underlying performance from our asset based services around the world.
Let's go now to Theepan Jothilingam, Morgan Stanley.
Theepan Jothilingam - Morgan Stanley
A couple of questions actually, firstly just on production perhaps I think you mentioned a return to growth and can you sort of give a little bit of flavor in terms of startups and relative to 2010 what you are expecting '011 and '012, I know we’ve got the March presentation coming up, but do we see a substantial ramp up beyond 2010.
Secondly, just a follow-up question on 2010, I wonder if you could give a little bit more color on assumptions on three areas Iraq, Russia and also US gas. Thank you.
Let me ask Andy to give you a brief synopsis, to go through in detail would take a long time, but let me give Andy to give you a brief synopsis, both of the projects we see starting up over the next couple of years. But also I think importantly the final investment decisions that we anticipate taking over that time frame as well.
Thanks Theepan. We will obviously also cover this in more detail in March, while I give you the overall cover. Clearly we had very strong performance in 2009 it was sort of beyond what we had talked about and part of that is about confidence in the delivery in the base so as we look forward I think we demonstrated that the base is firm its performing well. And we have a sound basis on which to forecast future decline rates. So that’s the first thing that I will take away from 2009. Going into 2010 because you are aware it’s not a year of big startups in the upstream, just a couple of projects standing out, Great White and Noel Project in Canada.
By contrast, in 2010, we have a very long list of project starting and there are eight major projects starting up in 2011 through them in the Gulf of Mexico, the Galapagos area development and big time back in Na Kika the next phase of northern development of the Atlantis, Na Kika Phase 3 and then we have two large startups in the North Sea Skarv and Vallhall, we have the Liberty project in Alaska and Serette, the next phase of development in Trinidad.
So in a very long list of projects we are on track and I think we've demonstrated the delivery in our major projects over the last couple of years. But I think actually more important than those is actually projects that we are going to bring to FID in 2010. And off course that’s all about growth beyond 2011 sustaining that growth in to '12 and '13. And again it’s the long list I've actually taken enough time already but if you go down the FIDs in 2010 there are 12 in total, there will be 5 in the Gulf of Mexico, Mars B, Atlantis North continuing growth there, Horn Mountain Phase 2, Na Kika Phase 3. The next phase in the North Sea, (inaudible) Chirag Oil Project, Azerbaijan; Clov in Angola; Sunrise in Canada and then the extensions in North Africa and [so in the mean] so a long list and that list then continues into 2011.
So as you can see there is a pause in the major projects in 2010 and that was part of what we told you about and in March of last year but the future looks very strong in terms of the project so it will actually start up in 2011 most important the list of FIDs that are being progressed at the moment.
Thank you very much Andy lets now go to Jonathan Rigby. Jonathan, UBS.
Jonathan Rigby - UBS
Couple of questions actually the first is on the downstream profit its sort of going around a bit compared to the sensitivity that you give I think 3Q looked like it outperformed 4Q looked like it underperformed and I just wonder whether you could give us some color on what the bits outside refining were doing? How would characterize that performance in the fourth quarter whether the earnings capture to come back as may be trading or business whatever begins to normalize. The second question is just on the impairments in the U.S. I guess did this come from a change of view of the outlook for refining on the west coast of the U.S. If so and what is that and will it change your plans for investment into the downstream in North America as a result? Thanks.
Let's go to Iain to talk about both the profit and the impairment and our views going forward.
Thanks Tony, Jonathan thanks for that. Firstly on the downstream result in 4Q versus 3Q which I think was your question. The rules of some as you would rightly point out only give about a $450 million deterioration out what was a $1 billion deterioration, so where did the rest of it come from. So basically half of it is a margin capture. And if I can split that out there are two things, one is below normal supply and trading performance. The volatility in the marketplace was quite low towards the end of the year and that was a major contributor and the second issue was that the rising crude oil price meant that a number of products which we price on a quarterly basis lagged the price and so we ended out with margin compression. So that dealt with about half of the difference that you can't see and the other half was costs. And this was a number dimensions we had hired turnarounds in the fourth quarter which I think we'd signaled. There were some other investment decisions that were slightly lumpy to do with sales promotion and lubricants and then really the rest of tit is phasing effects and 3Q have slightly lower costs in a phasing sense and 4Q slightly higher. So that's basically where that came from.
As far as the impairments are concerned this does result from the current low margin situation. Obviously you've got to join where we are today to a view of the future. And clearly we came of a considerable way over the year and the front end of any forward view clearly affects the NPV and carrying value of assets. And so we have to look at that in combination with the future view of margins in the West Coast and say this is the prudent thing to do. Obviously, we go through the goodwill assessment each year and although I'm not the CFO let me just say one other thing about it I mean we don’t amortize goodwill under IFRS and so clearly if we had done since we bought ARCO would be much of it left but we don’t amortize it and we've written it all off as a result of that margin assessment.
Thanks John. Let's go to Robert Kessler at Simmons & Company. Robert?
Robert Kessler - Simmons & Company
Couple more questions on production if you don’t mind. You reiterated that your long-term guidance is unchanged. I don’t know whether this would classify the long term any longer but just going back to your prior comments on what you were to achieve by 2012 and 2013. In early 2008, you threw out a target of 4.3 million barrels a day for 2012. I want to say that numbers or your growth rate from the early 2009 strategy update would have implied around 4.2 million barrels a day for 2013.
I'm glad to see you've got a heavy queue of project startups after this year but I'm wondering if both of those might be more of a stretch at least over that time horizon and what are your thoughts are on achieving a 4.2 plus kind of aggregate production figure might be?
I would say we're absolutely on track with the guidance we gave you at the Strategy Presentation a year ago, 2009. I don’t recall off the top of my head what the number in 2012 was then but the 1% to 2% sustainable is absolutely unchanged. We clearly had a bit of a flying start in that direction in 2009 and as Andy has indicated, the queue of projects waiting to both start up and move forward gives us a lot of confidence in underpinning that projection. I think if anything, we have more confidence in that projection today than we did a year ago because a lot of good things have happened in the course of the last year to further underpin it.
Robert Kessler - Simmons & Company
Another quick follow-up on Gulf of Mexico, obviously, a strong year in 2009, particularly with the absence of hurricanes and strong production from Thunder Horse. Do you expect that by 2011 you can see a repeat year of at least the 2009 production levels for your Gulf of Mexico assets or might you be lower than that level?
I'll ask Andy to deal with the details of the Gulf of Mexico.
As I am following your spreadsheet for you Robert but I think it would be fine to say that our goal is to grow production so I think if you have an assumption of holding it flat, that’s a pretty good assumption.
Let’s go now to Irene Himona, Exane.
Irene Himona - Exane
On cost if I may, excluding tax and energy costs it appears that last year you lowered cash cost by balance of $2.5 billion. So if we assume no changes to tax and energy costs going forward, how much more do you think you can do in 2010 by internal efforts and then secondly, could you talk a little bit about the potential for external supply chain costs, have these normalized to $70 oil price environment. Thank you.
Thanks Irene, we haven’t quantified it and we are not going to. We'll update you as we go through the year how we are doing in 2010. And what I would say is that we clearly have done a lot within BP to deal with costs and there is still some more to do and there is still the end of the programs we are currently running. You will notice that we took a provision in the fourth quarter of $500 million to cover further restructuring in the downstream which will clearly flow into the downstream cost basis we go forward.
We will of course also see the benefits of the full year in 2010 as the actions we’ve taken in 2009. I think in terms of the supply chain, we made some good starts in the matter of the supply chain in 2009, but its clear to us there is a lot more opportunity there both with respect to the supply chain itself and how BP approaches the supply chain, which I think is probably the biggest opportunity and Andy in particular will talk about that in the strategy presentation in March. Iain will talk a bit more about the cost opportunity we see going forwards in the downstream business in March, I would say both of them are material, so we think we got a lot behind us but we also think there is a lot of opportunity ahead of us.
Let's go now to Neil McMohan at Sanford Bernstein. Neil.
Neil McMohan - Sanford Bernstein
Hi just going back to reserves again, you've given plenty of color before your strategy presentation, but just a quick one on your present developers there. How is the growing this year, is it sort of holding pretty flat for the last two years. Just wanted to know how they were growing, certainly looks like your (inaudible) on developers there have gone upwards your reserve replacement numbers, but any clarity on that would be great, and I have got few more questions too.
Why don’t you finish your questions Neil, because you're not going to get a decent answer to that, you'll have to await the strategy presentation and the publication of the annual report.
Neil McMohan - Sanford Bernstein
Okay, and so keep going and your disposal plans going forward, it seems like there has been a sort of $3 billion run rate in terms of disposals. Any clarity on what you're looking to at disposals and anything in particular and just lastly on a cost question, DD&A per (inaudible) is rising over $1.00 or so above, over the last year. Any projection of how that's going to keep going over the next few years as you progress projects, and what you think the impact of a movement in natural gas prices as we continue to see the levels of $5-$6 Mcf this year relative to $3 or $4 Mcf for last year is going to be on your cost base thanks.
Okay let me take the disposal one; I think we will continue to assess the portfolio in dispose of non-core assets that means things that are peripheral to the business. We got a long list of things nothing of any particular notes individually. But all together add up to somewhere between $2 and $3 billion and as we do it, we'll tell you about it. In terms of DD&A, Andy would you like to?
Yeah I'd actually say that as you look at the downturn of '09 to '08 and primarily increase DD&A in upstream was all volume driven which sort of says that the unit right was relatively flat and I think as you look forward, I think we are starting to see the impact of the actions we're taking on capital efficiency and today's F&D is obviously tomorrow’s DD&A and the F&D cost have come down significantly in '09 versus our long-term trend. They are actually around $12 above versus five year rolling average of around 16. So you're seeing the step changes we're making I think both in capital efficiency and in the pull-through of reserves on that.
So I actually look to that is being an important part of us expanding the margin going forward, we obviously talked a lot about cash cost today but its equally important to ensure that we are working hard on the capital side which is ultimately the DD&A part of the margin.
So I feel good actually about the progress we've made on that and we still are going to see it turn up new turn up in F&D and clearly we'll start to turn up in DD&A and as Byron signaled, the increase for 2010 versus '09 is around $500 million and most of that has actually just to do with the difference in price, the SEC effect and difference in price $60 for '09 and the year end price for '08 was around a sub 40. So that’s the (inaudible) over there. So, I actually feel good about the long term trend on DD&A. But clearly just get back to the agenda that Tony's talked about which is his constant drive now to bring efficiency into all of the cost lines.
Thanks Andy, I think on gas price, you have to look at the capacity that's been created in the supply chain over the last two or three years I suppose and the key thing is that of course the recount is probably about half what it was two years ago. And I don’t think the gas price moving to $5 or $6 in Mcf is going to change materially at all the level of activity that the industry is conducting because put simply, we're all demonstrating, I think we have done this particularly but we are getting more out for the wells we're drilling which is about the application of technology and the advance of Shell gas in the U.S. where we’ve established I think a very strong position. So, I don’t think a modest increase in the gas price is going to do very much at all to tighten up the supply chain in the North American gas market.
Okay, let's keep going. Joe Tovey at Tovey & Company. Joe?
Joe Tovey - Tovey & Company
Couple of quick questions if I might, in the talks you had referred to the changes or t he problems that occurred because of the relatively excess capacity in the Atlantic basin in terms of refinery capacity. I think there's been reported shutdowns on the part of Valero, Sunoco and Shell in East, the Atlantic and in Montreal, about 300,000 barrels a day or more. Does that impact upon your outlook for 2010, and thereafter?
The short answer is no, Joe, because more needs to be shut in before the market is going to be coming back into balance. So, if you look at the supply-demand balance today is that the surplus capacity is probably closer to 3 million barrels a day than 300,000 so more needs to be shut in. let me say if Iain if wants to add anything.
I'd just add a couple of comments Joe I think firstly, the total volume either shut down on (inaudible) in the Atlantic basin by our estimate, somewhere between to 1.2 million and 1.4 million barrels a day, but as Tony says that even that will not make a material impact. The issue is that one of over supply particularly of distillate, and just by way of comment on the outlook, if you look at '92 to 2003, the global indicated margin levels were about $2.5 to $4.5 a barrel nominal, if you convert that into money at a day-to-day, the range is probably 3 to 5.5 or something like that, so I think our challenge is going to be to make the business profitable in a 2009 environment, and that's what we intend to do.
Let's move on to Colin Smith of ICAP, Colin
Colin Smith - ICAP
It's really a question for Iain, or two questions. One, can you just confirm that there is slightly lower throughput rates in Q4 or were, just or did you with turnaround activity, you had no economic shut-ins? And secondly just coming back to your comments about the 600 million that we can't quite see so easily, is it fair to characterize that as saying that at the Q4 margins structure with a more normal trading activity, more normal cost structure? You'd have been more like 600 million for the quarter in refining and marketing and chemicals? Thank you.
So, firstly on your first comment, the lowest throughput rates were predominately about Rotterdam turnaround that we had, so we had indicated a slightly higher turnaround. They are on the economic run curve that we experienced was very small one in Whiting Indiana because of lower volumes than expected in Canadian heavy. As far as the fourth quarter is concerned, I am not going to give you a breakdown as to what it would have been if the margins had been or if some of these other factors had been striped back.
But the comment I would make about it, because I didn't fully answer Jonathan's question earlier which is that clearly some elements of this to do with margin compression. One would expect to comeback, but I am not prepared to give you a number for the fourth quarter, because there are a lot of moving products in that.
Okay, thank you very much. Let's move on. I am going to take one from the web now Paul Spedding, HSBC.
Paul Spedding - HSBC
Could you give us some indication of production scenarios from the remainder of fuel project, timing and volume? It sounds like a question for my colleague Mr. Inglis Andy.
I think volume may be a little too precise, but let's give you some sense of the good progress that we are making. As you all know, we signed the contract and it was effective from the 17th of December. And we agreed the initial production target at that point, and I think the most important thing than is actually the relationship that we are building in country in particular with the Southern oil company and our partner CNPC. We had our first joint management committee at the end of last month of  January proves the budget. So there is real activity occurring now and that's important. So, as we sort of look at the first half of 2010, it is going to be about fine tuning the existing activities, unless you remember we'd worked with SOC for about three years I think prior to the contract, really advising them technically on the opportunity side in Rumaila.
So all of that work is now coming to (inaudible) and it's actually about ensuring that we've got the best activity currently being done a huge opportunity there and then in the back half of 2010 as we saw two contract and bring in new supply, new activity and increase of activity will occur. So we are off to a good start and we feel very positive about the progress we are making both in a technical sense, but actually in the relationships that we are building for the long term [we just want] this Endeavour is all about.
Thank you, Andy we've got one for Iain obviously there is another one from the web, [Alex Richardson at PHG].
Tony Hayward said recently I can confirm that he did, none of this will sell more gasoline than in 2007. Question, doesn’t the company need to consider closing refinery or reducing capacity in US or Europe? Iain
Firstly, you've got to stand back and look at the spread of different refineries in the Atlantic basin and the reality is, yes there is over capacity, but there is a huge range of different qualities of refining kit. And as you know from many years now we have been focusing on quality to do with scale the complexity and upgrading of the refinery, its integration, both with supply and trading envelopes and logistics, and making sure that our cost efficiency of the kit is good. Now, on most of those dimensions, BP's refining capacity is extremely advantaged, we have larger refineries than others.
They are more highly upgraded there in integrated positions and they therefore are advantaged so the bottom-line to your questions is no, we don’t think we need to consider closing refinery. We do absolutely have to drive the profitability of our refining portfolio up to reduce the breakeven margin, and we made a lot of progress on that in '09 versus '08 and the market came down a little bit further than our progress, but we are fully intent on being able to make refining profitable in our 2009 environment.
Thanks Iain, lets come back to the phone and go to Jason in Sunny Edinburgh how are you Jason?
About TNK-BP slightly behind low as expecting at least, just wondering if you can give me a bit of the moving part there because quarter-on-quarter with the price increase and the volume increase I was not expecting profit to be down and I did have a second question on the Tangu ramp-up and the expected production levels 2010 and may be 2012 from Tangu?
Yeah I think if you look at TNK-BP operationally its running very well productions obviously still growing, I suspect that on a quarter-on-quarter sense that we had a small game from the Weatherford transaction in the prior quarter which may have lead you to misproject what the fourth quarter should have been Jason there may have well been some tax effects as well, but in operationally the company is running very well and its realizing a good price for the oil and gas its selling. Andy.
Yeah I would add Jason is also the big markers within Russia when didn’t move quite as high as markets internationally, so there was a mix effect there between the actual realized price within country versus stuff that’s exported. So I think that was also an effect in the quarter.
Okay. Can I just have a quick follow up on that, actually it’s on your group CapEx budget, $20 billion for 2010. Are you doing more for less this year?
We certainly are and Andy will go in to some detail about how we are doing more for less in 2010 and months from now but it's pretty clear that that’s the outcome.
Let's go now to Mark Gilman.
Mark Gilman - The Benchmark Company
I had three quick ones. First on, Rumaila. Can you give us an idea how you are going to report Rumaila, both financially and operationally and did it contribute to the 2009 reserve bookings. Secondly, could you just clarify what price assumption you are making in terms of the 2010 production guidance?
Thirdly, the TNK dividend, very aggressive in the fourth quarter. Looks like about an 85% pay-out ratio for the year. I thought the re-leveraging of TNK had pretty much been completed, could you give me some thoughts on the aggressive nature of that dividend?
Okay, thanks Mark. Rumaila, we're still deciding how we will report it and as we decide we'll tell you probably wait until this time next year when we will be disclosing for the first time how we would expect to report it.
In terms of the guidance for production for 2010, as I said it's entirely in line with our guidance from this time last year which was done at $60 a barrel. In terms of seeing TNK-BP dividend, I think we have an agreement that says [oil] dividend 40% of net income, but we continue to look at the opportunities available in the company and the capability we’ve built and make the right balance accordingly.
So I think we will continue to see some lumpiness in the TNK-BP dividend. It’s the benefit of having what is an essentially a private joint venture. We can sort of move the thing around as makes sense for the moment. You asked me if there are any Rumaila reserves in 2009. The answer is definitely no.
Okay. Let's go to Lucy Haskins at Bar Cap.
Lucy Haskins - Barclays Capital
I think last year Tony you spoke about a good time to post more capital on the balance and I wondered where in the world you might be thinking about pursuing non-organic growth opportunities. I think there was some talk coming out of [Dovell] that Brazil is an area of interest but I also wondered how you might be pursuing an agenda in Africa as well?
Well, as you know we don’t disclose what we're intending to do ahead of doing it in this matter. So I'm certainly not going to, but I have said publicly in the past that if I look at our portfolio in E&P there are a couple of places where we would like to deepen it, one of which is West Africa, one of which is Brazil and the other of which was Asia Pacific and we've made some moves in at least one of those areas this year, not necessarily through a big acquisition. So I think just watch and wait.
Lucy Haskins - Barclays Capital
And is there any sort of cap in terms of the size of the transaction you might certainly affordable at the corporate level.
I think the answer is if we see great opportunities where we think we can add real value to secure resources then we will do so, but of course we don’t need to. We’re continuing to add resources to the portfolio in a very effective way through the exploration drill bit and though direct negotiated access. So it is has to be something pretty special to want us to go and buy it.
We’ve talked about where we are in our gearing range. We are right at the bottom end of that, so we’ve got plenty of financial wherewithal to acquire assets if we can find opportunities that are attractive.
Okay let’s go to Sergio Molisani at UniCredit.
Sergio Molisani – UniCredit
So just one quick question, if I may a follow up on 2010 production guidelines, could you give us some more color on the expected contribution from the ramp up of the 2009 start-ups for the entire upstream portfolio and then in the [tails], if it’s possible adding some more flavor on the Tangu development in 2010 and 2011.
I think the right answer to this question is to we will deal with this in the March strategy update when Andy you will go into production, not only in 2010 but looking at over the next four or five years, a lot more detail, Sergio. So if you can just await filling in the spreadsheet, until the 2 of March, you will get a better answer, okay.
Let’s go to Pavel Molchanov at Raymond James.
Pavel Molchanov - Raymond James
Could you give us a quick update on Cascada and what we might expect from any results there in 2010?
Yes, in 2010 we are going to drill the next appraisal well and that appraisal well will is then targeted to be a full field test, a flow test from the well which will clear the backend of 2010 through 2011. So as you look at the [phylogene], the key uncertainties around well rate and obviously that flow test is an important piece of information.
So the well will be going down this year and the flow test will occur in 2012. We are very hopeful around what that result will bring, so important progress on it and obviously it’s a significant resource and we are making good progress on bringing it forward to a development decision.
Thanks, Andy. I think this is now the last question which is Neill Morton at MFG
Neill Morton - MFG
Just a couple of quick ones please, just from a qualitative perspective can you just repeat your comments from the start of your presentation last year where you said you talked about long term growth of 1% to 2%, to end of this decade from the existing resource base. So if the resource base grows, can we assume that 1% to 2% as sort of minimum target threshold and just secondly how much will BP be spending in Iraq in 2010?
I think 1 to 3% remains 1% to 2%. It’s what we think is sustainable, both in the medium and long term. Clearly as we add resources, we continue to high grade to make certain we develop only the highest quality resources. So this is about quality through choice, not pursuing every option that we. It’s the first point I would make. In terms of Iraq, let me ask Andy to repeat what he said earlier about Iraq in terms of what we're doing.
There would be two precise advantages (inaudible). I think what we have is a very clear plan in place, that plan is initially about getting the most out of the current activity set and to give you an exact number we need to get about a hand on how we can handle and optimize that. It went really into the backend of the year that you would see any real ramp up, up and spending as we start to increase the activity set.
So I think we will keep you updated, but I think it would be an imprecise forecast, most important about it is the progress we are making and actually executing the activities which absolutely in line with the plans that we had when we made the recent proposals as part of the bid and that’s as a result of looking at the field for over three years. So the activity has being executed well.
Thanks very much Andy, I think that brings us to the end. Let me just say few words by way of wrapping this up. I think we have achieved a lot over the last few years and BP is beginning to run well. The exploration success and resource access that we achieved in over the last few years has given us a lot of confidence in being able to continue to grow production. The project starts up in 2010 and ’11 which we'll review in detail March give us confidence about the near term and the FID decisions that are in front of us which we'll also review in detail in March, by giving us confidence about the medium term.
We also believe that there is significant further potential to be realized from our existing assets, both in terms of costs and capital efficiency and we are planning to review all of that with you on March 2. So we are very much look forward to seeing as many as you as we can in early March. Thank you very much again for listening to us and we hope that we've answered all your questions. Ladies and gentlemen good afternoon.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!