英國石油 (BP) 2008 Q4 法說會逐字稿

Welcome to the BP web cast and conference call.

I now hand over to Fergus McLeod, VP and Head of IR.

Welcome to the BP's fourth quarter 2008 results conference call.

My name is Fergus McLeod, BP's Head of Investor Relations Joining me today are Tony Hayward, our Group Chief Executive, Byron Grote, our Chief Financial Officer, Andy Inglis, Head of Exploration and Production, Iain Conn, Head of Refining and Marketing, and Vivienne Cox, Head of Alternative Energy.

Before we start, I'd like you to take a moment to read the next slide.

During our presentation today, we'll be making forward-looking statements.

Actual results may differ from these plans or forecasts for a number of reasons, such as those noted on the slide and also in our SEC filings.

I'd also like to remind you that we are holding our annual strategy presentation on March 3.

The detail on some subjects like reserves replacements and capital spending plans will be covered then.

Thank you, and now over to Tony.

Thank you, Fergus.

Ladies and gentlemen, good day and welcome to our full-year results for 2008.

Before Byron takes you through the fourth quarter and full year in more detail, I'd like to spend a few minutes on an overview of the past year.

When I last spoke with you in July of last year, we were discussing how high oil prices were.

Now across the world, the economic outlook has changed significantly.

In the developed nations, governments have have had to take a major stake in the banking system.

The OECD countries are already in recession.

That for the moment continues to deepen.

In the non-OECD world, growth has slowed dramatically.

This is having a large impact on oil demand, which in 2008, fell by around 500,000 barrels a day versus 2007.

And with many economists now predicting no global growth in 2009, demand for oil will continue to fall.

Right now, the short-term direction of the energy markets are probably less clear than ever.

I'll talk later about how BP is dealing with that.

Let me begin with the 2008 full-year financial result and what was a record year for the group.

Our replacement cost profit of $25.6 billion up 39% over 2007.

This is equivalent to $1.36 per share, up 42% on 2007, showing the benefits of share buybacks early in 2008.

Place tax operating cash flow was $38.1 billion, up 54% over 2007.

We invested a total of $30.7 billion, including acquisitions and asset exchanges.

Total 2008 dividends paid were $0.5505 per share, up 30% in dollars and 40% in Sterling against last year.

This means we distributed $13.3 billion to shareholders, including $3 billion in share buybacks.

Our financial condition is strong.

We're gearing in the new year at 21%, at the bottom of our target range of 20% to 30%.

Now to an overview of BP's operational performance in 2008.

A year ago, we set out a plan to deliver safe and reliable operations, to restore revenues and reduce the complexity and cost structure of BP.

We've done exactly that.

Our safety and operational integrity performance has continued to improve across the company.

In E&P, reported production was up, and growth in 2008 was 5% on an underlying basis, which excludes the effects of production sharing contracts.

We started at nine major projects, including Thunder Horse, which is today fully commissioned and running stably at around 200,000 barrels a day of oil equivalent.

In R&M, we've rebuilt full economic capability at both Texas City and Whiting.

In the fourth quarter, refining availability was at 91%, the first time it's been at this level in over three years.

On costs, we've made solid progress.

Despite higher energy costs and inflation in the industry that stood at 15% in the middle of 2008, our costs fell in the fourth quarter.

Across the group, we've begun to see the impact of our efforts to reduce them.

Costs have been falling year-on-year in E&P, R&N, and above all, in our overheads, which were down by $500 million in the fourth quarter versus a year ago.

Taken together, growing revenues and falling costs, BP has very strong operational momentum as we enter 2009 in what will clearly be a much more challenging environment.

Let me now turn to strategic delivery, starting with E&P.

It was a very good year for our E&P business, which delivered against a key goal of production growth.

Of course it's not only about production today, it's also about pursuing and developing options for growth in the future.

In 2008, we achieved significant new access, in particular in North America.

In addition, we've had one of the best years in the past decade for exploration success, with significant discoveries in the Gulf of Mexico, Angola, Algeria, Egypt, and the North Sea, which serves to highlight the strength and breadth of our exploration portfolio.

We expect this to enable us to achieve resource replacement of more than 200%, and reserve replacement of more than 100% in 2008.

This continues our track record of 100% reserve replacement ratio over the last 15 years.

In addition, we've had nine major project startups, including Thunder Horse, which is proving to be a major success.

In the downstream, we've made solid progress with a turnaround of the business.

Our focus remains on safe and reliable operations, restoring earnings momentum, and delivering sustainable, competitive returns.

The key achievement was the recommissioning and restoration of full economic capability at both the Texas City and Whiting refineries.

As I've already mentioned in the fourth quarter, refining availability was 91%.

This sets us up well for 2009 and further improvements.

The fuels value chains are fully established, and we expect to see the full benefits of this beginning to emerge in 2009.

We've made significant progress in simplifying the footprint of our downstream business.

In Air BP, we've exited 32 countries and in lubricants, we've reduced our direct presence in 13 countries and plan a reduced presence in a further 17.

In the US east of the Rockies, to date, we've sold 293 of the planned 800 sites.

Our international businesses of lubricants and Air BP continue to perform strongly, despite the significant economic slowdown through the fourth quarter.

Taken together, on an underlying basis, the downstream has closed around $2 billion of the gap in performance that Iain identified this time last year.

Turning now to our overall progress in reducing the complexity and cost base of BP.

At the end of 2008, we've reduced our corporate overhead by around 3,000 people, and are on track to exceed our original target of 5,000 by the middle of 2009.

We've reduced management layers and eliminated nearly 20% of the senior positions.

We've made good progress, but we're not being complacent.

In the current environment, we need to maintain the momentum that we've established, continue the drive to make BP more efficient.

The mantra in BP today is every dollar counts, every seat counts.

In alternative energy, we have significantly focused the portfolio and footprint.

In summary, at the end of 2008, BP has significant operational and strategic momentum.

The full benefits of which we expect to see as we move into 2009.

Let me now hand over to Byron to take you through the financial results in more detail.

Thank you, Tony.

I'll begin my review of the quarter and the year with a summary of the trading environment.

The table shows the percentage year-on-year changes in 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 a market environment that was substantially weaker.

Our liquids realizations more than halved compared with the third quarter, falling to $52 per barrel, 37% lower than 4Q '07.

Our 4Q gas realizations reduced to just over $5 per 1,000 per cubic feet, 22% lower than the previous quarter, but 5% higher than a year ago.

Taking both oil and gas together, our total average hydrocarbon realization was down 27% compared with 4Q '07.

Our refining indicator margin of $5.20 per barrel was 8% lower than last year.

Our results, which I'll now turn to, reflect progress in driving through underlying business momentum against the rapidly deteriorating economic landscape.

Our fourth-quarter replacement cost profit was $2.6 billion, around 25% lower than last year, reflecting the much weaker market environment.

The result was adversely impacted by three specific items, a significant loss in TNK-BP, due to the export duty lag and impairment charges.

A large negative ForEx effect on certain in-transit barrels in the refining and marketing segment.

And finally, an increase in the 4Q tax rate due to the accounting effects of the TNK-BP losses and the impairment of our shareholding in Rosneft.

This was partially offset by a large, positive consolidation adjustment reflecting the significant fall in the price of equity crude held in the refining and marketing segment.

Added together, these impacts reduced our underlying post tax result by $900 million.

In spite of the fourth-quarter increase, the full-year effective tax rate was 36%, in line with the guidance provided last February.

Nonoperating items and fair value accounting effects had virtually no impact on the result compared with an unfavorable effect of $1.1 billion in 4Q '07.

Fourth-quarter operating cash flow of $5.6 billion was around one-third higher than a year ago, reflecting the working capital benefits of lower prices, partially offset by the normal seasonal build of inventories.

The $0.14 per-share dividend announced today, which will be paid in March, is 3.5% higher than a year ago.

The Sterling dividend is up by more than 40% year-on-year, reflecting the much stronger dollar.

I will now turn to the segments.

In E&P, we reported pretax profit of $4.8 billion for the fourth quarter down $3.1 billion compared with last year, reflecting the significantly weaker oil price environment.

The 4Q result had an overall net benefit of $500 million from fair value accounting effects and nonoperating items.

The nonoperating items included a $500 million writedown of our investment of Rosneft, based on its year-end quoted market price.

Adjusting for these items, our underlying result was $4.3 billion compared with $8.4 billion in 4Q '07.

Reported production was 1% higher than a year ago.

Adjusting for the impacts of production sharing agreements, underlying production increased by 4%.

Full-year production was in line with the guidance we provided in February, 2008, our underlying production grew, as Tony indicated earlier, by 5%.

The quarter also benefited from increasing momentum and reducing costs, with 4Q costs down year-on-year in spite of the high inflation environment that the business faced during most of the year.

The gas marketing and trading performance in the volatile 4Q environment was stronger than a year earlier.

TNK-BP generated a loss of $700 million in the quarter.

The impact of the calculation lag on Russian export duties in the falling 4Q price environment was a loss of around $500 million.

In addition, a number of impairments, which we do not classify as nonoperating items when they're within equity-accounted entities, resulted in a $200 million charge.

Recent changes in Russian tax legislation will benefit the TNK-BP contribution and significantly reduce the tax lag effect.

In refining and marketing, we continued to make headway.

Pretax profit was just over $400 million, including an impact of over $200 million from nonoperating items, including restructuring costs and impairments, and fair value accounting effects.

Excluding these items, the underlying result was nearly $650 million, over $700 million better than a year ago despite a much weaker environment.

The fourth-quarter result benefited from improved operational performance, a greater supply and trading contribution, lower costs, and improved marketing margins.

While the indicator margin was lower, our restored capability allowed BP better capture of available refining margins.

However, the petrochemicals business experienced a severe downturn in 4Q, materially impacting both margins and volumes.

The improvement in underlying performance was significantly offset by negative foreign exchange effects caused by the rapid strengthening of the US dollar on in-transit barrels into our non-US refineries, and by the adverse impact of prior month pricing of domestic pipeline barrels into our US refining system.

And finally, a critical milestone was achieved on December 31 as Texas City returned to its full economic capability with a successful startup of ultraformer number three.

Compared to 2007, and adjusting for the significantly lower refining margin and adverse ForEx effect in 2008, our underlying profitability has improved by more than $2 billion.

In other business in corporate, the fourth-quarter result was a net charge of nearly $700 million, including $300 million of nonoperating items comprised mainly of restructuring costs and impairment charges.

The underlying charge for the fourth quarter was $380 million back in line with the quarterly guidance provided in February.

The result reflected continued reduction in corporate costs from our restructuring and simplification efforts, but weaker contributions from our other operating businesses and various group level charges.

Turning now to cash flow, this slide compares our sources and uses of cash in 2007 and 2008.

Operating cash flow increased to $38 billion, up 54%, and disposals provided a further $1 billion.

We used this cash to fund $22 billion of organic capital expenditure, up 13%, and an additional $3 billion in acquisitions.

We distributed $13 billion to our shareholders with dividends paid exceeding $10 billion, up 28%.

On the basis of our current plans, we expect 2009 cash flows to balance at an oil price of between $50 and $60 per barrel.

With that break-even point continuing to reduce as upstream volumes grow, the full turnaround of the downstream is realized, and our ongoing cost initiatives deliver further benefits across all parts of the organization.

Our net debt ratio was 21% at the end of 4Q, which is at the lower end of our targeted band of 20% to 30%.

The gearing level reflected a $3 billion increase in our net debt over the quarter, consistent with normal seasonal trends.

We issued nearly $5 billion of new bonds during the quarter and continued to utilize commercial paper markets for inexpensive, short-term funding.

We built a substantial cash buffer during the quarter and have continued to hold it as a liquidity contingency.

We have a strong balance sheet, and a gearing framework with considerable head room.

This affords us the cash flexibility to address further environmental weakness if it occurs, or to access attractive asset opportunities that the current environment might present.

We rebelanced our distributions in favor of dividends at the beginning of 2008 and suspended our share buyback program in September in light of the uncertain environment.

Our dividend is covered on an underlying earnings basis at a Brim price in the 40's, and we expect ongoing cost reductions and business growth to continue to push that lower.

Turning now to 2009 financial guidance, our 2009 organic CapEx is planned to be between $20 billion and $22 billion, broadly similar to 2008.

We expect disposal proceeds to be between $2 billion and $3 billion, and are confident of this level of delivery even in today's difficult transactional environment.

The effective tax rate for the year is expected to be in the range of 36% to 39%, in line with 2008.

The quarterly rate will tend to show some volatility as in 4Q, especially if prices and margins move across the wide ranges they did last year.

In other businesses and corporate, charges are expected to grow in spite of the reduction in corporate overheads as a strong contribution from other businesses that we saw in 2008 reduces in line with the weaker environment and certain overhead costs previously charged to the segments are now retained in OB&C for more effective cost management.

Quarterly underlying charges are expected to average in the range of $400 million to $500 million in 2009.

And finally, our DD&A charges in 2009 are expected to increase by around $1 billion, reflecting the startup of new projects and underlying production growth.

That concludes my remarks.

Now back to Tony.

Thank you, Byron.

Let me finish by summarizing how we're approaching 2009 and provide a recap of our strategy.

As I've already said, as we leave 2008, BP has considerable operational momentum, which we expect will continue into 2009.

Production is expected to continue to grow.

By exactly how much will depend on OPEC constraints and the oil price and its impact on production sharing contracts, refining availability is expected to be materially higher in 2009 than in 2008.

As a result of our actions in 2008, costs should continue to fall throughout 2009, helped by our determination to drive deflation into the supply chain.

We intend to hold the cost, continue our focus on safe and reliable operations, continue our focus on simplification, cost reduction, and increasing the overall efficiency of BP, whilst investing for the future.

As Byron has already stated, organic CapEx in 2009 is planned to be between $20 billion and $22 billion, in line with 2008.

As regards to use of our cash flow in 2009, our priorities are clear: continue to invest in safe and reliable operations, pay the dividend, invest to grow our upstream business.

Our aim is to strike the right balance for shareholders between current returns of our dividend, sustained investment for long-term growth, and action on costs to respond to the current challenging environment.

I'd like to finish by summarizing our strategy again.

It remains a consistent and enduring one.

It is to grow our E&P business, to turn round our downstream business, to make focused, selective, and disciplined investment into alternative energy, and to simplify and drive greater efficiency into the entire company.

And to pay a progressive dividend in line with the underlying earnings potential of the group.

At BP, we've been managing volatility for 100 years in good times and bad.

The next year or two will be challenging, but we're well positioned to meet that challenge.

Ladies and gentlemen, thank you for listening, and we will now be delighted to take questions.

(Operator Instructions).

If you're listening on the web, please submit your question using the web question facility.

Okay.

If I can go first then to Mark Bloomfield at Citi.

Mark, good afternoon.

Good afternoon.

Yes, in downstream you've talked of closing around $2 billion of the performance gap of your peers that you referred to last year.

I just wondered if you could remind us of the underlying refining margin assumption that's based upon, and perhaps give some explanation of how that translates to 2009 potential in the current environment.

And I also wondered if you could perhaps give us a sense of the remaining improvement potential and the kind of timing of that capture, please.

Sounds like a question for Iain.

Iain?

Thank you very much, Tony.

First of all, the gap that I indicated back in February was a total of $3.5 billion to $4 billion a year pretax at a global indicated margin of $7.50.

Now we have estimated, as Tony indicated, having closed $2 billion in 2008, and the basis to that is pretty straightforward.

As Byron indicated, we have delivered $600 million less profit in '08 than '07, in an environment that can be summarized by the global indicated margin of $3.3 billion worse.

So our own performance has improved by well over $2 billion a year.

Our competitors have obviously improved their own performance to some degree, and the result of all of that -- and I'll give more details of it in a month's time -- is that we're confident we've closed about $2 billion of the gap in 2008.

As far as what remains, still confident that we have about another half to go.

And as far as '09 conditions are concerned, the year has started with refining margins above $7.50, at about $8.70 so far.

But obviously with weak demand.

We have to be careful in extrapolating that for the rest of the year.

Thank you very much, Iain.

Let's go to Robert Kessler in the US.

Good morning, Robert.

Hi, good afternoon, Tony.

With respect to your guidance for balanced cash flow at $50 to $60 per barrel, I'm curious how much you might have assumed as a dividend from TNK-BP.

We are assuming that in the current environment that TNK-BP will be broadly neutral in terms of both earnings and cash flow.

So if the current environment persists, that's to say price in the 40s, it will be marginally positive.

The break-even for TNK-BP is in the high 30s.

Okay.

Thanks for that.

Then with respect to your reserve replacement, 100% organic replacement, how much of a net benefit might have been included for price effects?

We'll disclose the details of our reserve replacement to you in March, Robert.

What I would say is it was a strong performance I think from the cost of portfolio.

Very well balanced with additions from across the breadth of the portfolio.

Okay.

And then finally, from the -- I would expect more detail on this --

A three-part single question, is it, Robert?

Right.

Three parts.

Quickly, four million barrels a day to 2020, you're still confident with that?

Yeah, we are.

And we'll be updating you on our longer term outlook a month from now with our strategy presentation.

Thank you.

Thanks.

Let's go to Jason Kenney in Scotland.

How are you?

Thanks.

Well from snowy Scotland.

Snowy in London, as well.

A bits of a turnaround.

US gas realizations very weak.

I think only 56% of the first of the month index.

And I was looking to something closer to 70% maybe.

Maybe if you could give me some of the moving parts there.

And then on the -- the UK gas realizations, actually quite strong which is not a bad thing.

Could you give me some indication of how long the -- the kind of lag effects for gas prices in the UK are expected to last versus to the very short fall in oil prices?

Yep.

Let me ask Andy to talk about gas realizations.

Yeah.

Jason, you're right.

We have seen a broadening of the dip.

If you look from 4Q '07 to 4Q '08, quite a substantial growth.

And actually versus 3Q '08.

It's broadly across all parts of the portfolio whether it's in the Rockies, San Juan, through the Permian and mid-continent.

You're seeing a backup of supply.

And it's probably realistic to believe those dips are going to be with us through 2009.

In terms of the UK, again, I think we're seeing slightly more positive realizations at the back end of the year.

Again, I don't think -- we should probably be fairly cautious on forecasting those into 2009.

Thanks, Jason.

Let's go to a question from Neil McMahon from Bernstein.

Two things wrapped into one, because I'm talking about the quarter.

Looking -- what I found surprising was that there was relatively little impairment charges or what seems to have been reserves written off given the rapid drop in oil prices, and I just really wanted to get a sense of the -- all the goodwill you've got on the balance sheet.

What do you think oil price levels that would be good to -- in terms of an impairment charge?

And whether you did see any relatives coming off based on some of your bookings over the last few years given the rapid drop in the price?

As I said earlier, we go -- we'll go into a bit more detailed reserves a month from now.

There were clearly some negative revisions, there always are.

What I would say is the lack of material impairment speaks to the robustness of the portfolio, to low prices.

It was designed for low prices.

And much of the goodwill sitting on our balance sheet has been there for a very long time.

It was put on when the oil price was much lower than it is today and much lower than I think any of us expect it to be.

It is down at $25 a barrel.

So we don't have the issue of having deployed large sums of capital in a rising price environment.

Our major transactions were all conducted at a much lower price regime than we've seen.

Sure.

It was mainly the fact that you've got a lot of rising costs in that period, as well, on what were and are currently pretty mature assets.

So I was wondering if that may have affected it at all.

I just -- one quick other one, which is really on your tax guidance going forward.

Could we assume that the rise in tax for 2009 is going to be something that we see at a -- a small escalation going forward beyond that?

Let me ask Byron to address the tax question.

Yeah.

Neil, just to -- to reinforce what Tony was saying about the impairment.

I mean, obviously we go through and test all of our assets at the end of the year.

And I'll tell you, unlike some competitors, we found that we have plenty of headroom, even at the $40 and under prices that we saw at the end of 2008.

So we're not worried about any writeoff of -- of goodwill in the upstream.

As far the tax rate goes, if -- a big contributor to what we saw in the fourth quarter and the spike and maybe you should think about that as a little microcosm of 2009.

The impact in particular of TNK-BP suffering losses in 4Q which was exacerbated by the impairment and writedown of our investment in Rosneft gives an uplift on the tax rate.

If you look across 2008 as a whole, across the year when we had an effective tax rate of 36%, in spite of that 4Q spike, TNK-BP made a very strong contribution.

And -- in the first three quarters.

And Tony's said a bit about what we'd expect in a $40 environment.

So what we're looking at a lower price world, and - the distorting effects of the way in which associate companies come into our income statement and the way the effective tax rate is calculated.

What I'll tell you is that our underlying tax position is -- is essentially unchanged from 2008.

And at this time last year, I gave you an indication of an effective tax rate of 36% to 38%.

The only thing that's changed is really the environment and the way in which that focuses in on our income statement.

Okay.

Thanks.

Thank you, Byron.

Let's go to Mark Iannotti.

How's the new world working out for you, Mark?

Fantastic.

Let me ask a few questions.

I have to go back to the cash flow, break even, $50 to $60 that you're indicating today.

When you just look at 2008, when the oil price was $97, adjusting working capital fees you -- you're barely cash flow neutral this year.

Just how do you get, particularly having the gains of higher tax, higher IBC in year.

How do you get to such a low cash flow break even in 2009?

Second question if I can for Andy.

Can you maybe just talk a little bit about any major FIDs you have for this year.

If you think you'll have any delay to the FIDs.

And maybe a general comment on cross trains you're seeing in this lower oil price environment.

Thanks.

Okay.

Well I don't propose to go into a spreadsheet reconciliation with you.

What I can tell you is based on my spreadsheet, our break even will be between $50 and $60 a barrel, as I said.

We have strong momentum in terms of falling costs which we expect to accelerate as we drive deflation into the supply chain.

We have growing revenues, and we're holding the course on capital.

If you hold that together, our view is that we're cash break even between $50 and $60.

If you want to explore it further, I'm sure Fergus will be happy to discuss it with you.

Let's ask Andy about FIDs and project progress.

Hi, Mark.

The big around the pace at which we're investing in the upstream makes me sure that we are true to the strategy of growing the upstream.

Clearly for things that are currently being executed today and we're staying the course it's important that we maintain our exploration expenditure, particularly drilling so we're staying the course.

But I think where we have projects that are currently in the latter stages of [fee] where the investment decision hasn't been made it's important that we continue to drive capital efficiency into those projects.

The world is clearly changing around us.

We believe there is opportunity to work with our contractors to drive that capital efficiency.

And we will take the time to do it.

We've clearly not been driven by volume.

So in areas that we're looking at, we obviously have future FIDs to come up in the Gulf of Mexico, around recent discoveries in Kodiak and Freedom.

In Egypt around the West Nile delta discoveries.

The program approach in Angola, these are all areas where we can believe we can improve the capital efficiency.

And drive for better margin into the projects.

I don't think the FIDs are going to be delayed by long.

But I think that there is the opportunity in the current market to benefit from some deflation.

And I think we are starting to see that deflation come through.

Tony has talked about the cash costs improvements we've seen in the -- at the group level in the fourth quarter, those are evident in the upstream in the fourth quarter with cash costs actually lower in the fourth quarter of '08 than they were in the fourth quarter of '07.

And we're aggressively going after those cost opportunities and they're both in a cash cost sense, and they're also there in a capital sense.

I think it is -- it's a great time to drive that efficiency into the business.

Thanks, Andy.

Let's go now to Joseph Tovey in the US.

Joseph, good morning.

Good morning.

Thank you for taking the call.

I had what I hope are not an unreasonable number of questions.

Number one, I was wondering as to whether the tanker exposure of the company is such that you are basically net long or net short in today's market.

Obviously it's -- tankers are a major commodity and cost for a fair number of companies.

I suspect BP is one of them.

Okay.

Is that it, Joseph?

No.

That was one question.

Why don't you get the questions out and then we'll --

Okay.

Sorry.

You mentioned that you were adequately liquid.

I was wondering if you managed to avoid many of the torpedoes coming through the impact upon banks of the latest set of disasters.

Whether you'd -- whether you would basically have gotten yourself any government paper, that you'd avoided those problems?

And the third question that I had related to the pension plans, was there -- I would imagine there some impact of the markets on the asset classes.

And is that resulting in any sort of substantial charges for this year?

And anticipated for future years?

Great.

Thanks, Joseph.

This all falls under Dr.

Grote's bailiwick.

Byron?

Thanks, Tony.

Joseph, as far as the tanker exposure goes, we have our own vessels and term chartered vessels and spot chartered vessels.

So we start out in -- in a net short position relative to our underlying needs.

Over the course of much of 2008, we benefited when spot market prices were greater than the -- than the costs of having acquired and operating our own fleet.

That was reflected in a benefit that showed through in other business and corporate.

As I indicated, looking forward with rates down substantially, we won't be seeing that degree of benefit.

Certainly not in the first part of 2009.

We manage our credit exposures very tightly with respect to all counterparties.

And the outcome of managing it extremely effectively was that indeed no torpedoes hit this particular vessel.

And we're pleased to have avoided what was a very tumultuous fourth quarter in the financial markets.

And as far as pension plans go, yes, we have a significant portion of our assets in our funded plans invested in equities and like pretty much every other pension plan on the planet, saw a decrease in that asset value over the course of the last calendar year.

In the United Kingdom, we continue to have a surplus, and no need to contribute into that particular funded plan in 2009.

Some of our other funded plans are a little bit in deficit.

But in aggregate, they're just shy of being fully funded.

We've traditionally been putting in between $500 million and $750 million into the plans over the course of the last four, five years, during the time that I've been CFO and it would be our intention to operate within that space again in 2009.

Great.

Thank you very much, Byron.

Let's go to Theepan at Morgan Stanley.

Theepan, good afternoon.

Good afternoon.

Just a couple of questions actually.

Firstly, on CapEx.

I was wondering if you could provide a bit of color on what sort of commitments you've got to CapEx in 2009.

Secondly, you talk about sort of deflation in the supply chain.

I was sort of wondering if you could again provide sort of details of where you see the opportunities and what you've incorporated in the guidance you've given for 2009.

And the second question actually is just on -- on the dividend, you've been consistent on -- on the priority of payment of the dividend.

With a break-even of $60 or $50 to $60, if oil prices were to stay where they are today, is it simply a case of letting gearing rise, and what sort of level do you get uncomfortable?

Clearly you've got a target range of 20 to 30.

Is there a scenario where you would go beyond that?

Thank you.

Okay.

I think on the dividend -- if prices remain where they are, we clearly will allow gearing to rise.

We will also be doing a lot to reduce the inputs into the company to take advantage of what will be a strongly deflationary environment both in terms of costs and capital.

So sustaining the activity, but doing it for a much lower cost.

So, I think we have a long way to go on this, Theepan, before we're either coming close to getting out the top of our band or having to think differently about anything actually.

We feel pretty comfortable about where we are.

I think which sort of leads us on to deflation.

It's too early to say how much deflation we're going to see.

All I would observe is that if you look at the input price to factory gate, it's down by 60% to 70%.

If you add up energy and the prices of commodities going into steel, for example, and that will in the fullness of time flow through the supply chain.

Our challenge is to accelerate that flowthrough as rapidly as possible.

I think that probably covers what you wanted to know.

Yeah.

And this is a followup.

Tony, I was just wondering, in the past you've shown a lag of 12 to 18 months.

Do you think in this cycle or correction in price that could be quicker?

I think it's too early to say.

All I can tell you is that we will be pursuing this very aggressively.

I come from the standpoint that for the last three, four years, it's been a terrible time to put capital on to your balance sheet.

There is now an opportunity for the industry to reset its cost structure, and it will be a very good time to put capital on to your balance sheet, because we also live in the world which says the future has not been canceled.

It's been delayed by a few years.

And when growth returns, the demand for energy and the demand for oil will be strong.

So this is a great opportunity I believe for the industry, to get its cost base back in shape.

And to be investing with purpose for the future.

Great.

Thank you.

Let's move on to Jonathan Rigby.

Jon, how are you?

I'm very well, thank you.

Very formal.

You can call me Jon in the future.

Trying to figure out who to go to.

I was just jotting down the future's not being canceled in my notes.

As the new words.

Two questions.

The first is on the US downstream.

I was pretty surprised about the significant loss in there, and I know credit conditions have been very bad.

But the sort of outlying refining margins, marketing margins, et cetera, wouldn't suggest that would be that poor.

So are there any other things in there we need to understand about pricing petrochemicals, et cetera.

Any color that you can provide on that to try and understand where, given the performance is a lot better where we should be pitching financial performance?

The second is just on Thunder Horse.

Can you confirm, is it now at 200,000 miles a day running at plateau, or is there increased production capacity capability at the unit going forward?

Okay.

Let's -- Andy and Iain.

We go first to Iain on the US downstream, and then Andy.

Thanks, John.

I appreciate the question.

So what you're referring to, obviously, is if I run a comparison between 3Q and 4Q and strip out the NOIs and fair value effects, you basically have the downstream having made $150 million in the third quarter and having lost $687 million in the fourth quarter, which is a swing of $840 million or so, and you're right, that this effect isn't fully explained by the margins alone.

So let me just try and -- without giving you the numbers, just try and give you a guide to this.

I mean firstly the refining margins have been worse in the fourth quarter versus the third quarter.

And you guys can do a pretty good calculation of that.

But that's a material part of this.

And that's down to the weaker gasoline crack, predominantly East of the Rockies.

The other factors -- there's a bunch of other factors which net to a small part of this.

But you have highlighted them really.

The petrochemicals business has had a terrible quarter.

I think that's common across the whole industry.

Hurricane Ike resulted in some overhang into the fourth quarter and operational disruption.

And then we had a turnaround burden in the fourth quarter that was above the third quarter.

So all of those taken together is a small part of the 838.

The biggest single effect is something which is referred to in the refining and marketing part of the SEA, and it's to do with barrels in transit into pipelines in the United States.

We highlighted one of the one offs as being the foreign exchange effect on barrels in transit.

But part of what we also have in the United States specifically is crude and products that go into pipelines that are priced on the prior month.

And this is normally a small part of our overall result, because we don't get the sort of crude oil price fall that we saw in the second half of last year.

So about half of this effect is actually due to these barrels in transit.

Both product and crude oil going into pipelines east of the Rockies which price on the prior month.

And obviously we are net long all the time, a small volume.

And we wouldn't normally hedge this because BP is naturally long in the upstream to a much greater degree.

The effect of this has been rather large in the second half of last year, particularly in the fourth quarter.

And clearly given the size of the fall of prices in the fourth quarter, we wouldn't expect this effect to be repeated.

All right.

Andy?

Yeah, John, hi.

On Thunder Horse.

We're currently running at around 200,000 barrels of oil equivalent a day off four wells actually.

That's just Thunder Horse south.

So in term of what you can look forward to in 2009, we will be bringing on Thunder Horse north.

And, that will happen in the first half of the year.

Three, three wells to come in from the north.

That -- I genuinely believe, given the performance of the wells we've seen today will fill the facility.

We'll obviously find more about what the facility limit is as we fully test it.

But it will do design capacity, 250,000 barrels a day of oil.

And then you probably add on the associated gas which adds on another 20% to that.

So when we have the north on we're running with sort of seven wells in total.

That's what we'll be looking forward to.

We're all looking forward to it, Andy.

Thank you.

May I just -- one follow-up question for Byron.

It's just on the Rosneft impairment.

You've let the cat out of the bag with regard to making an impairment against its market value.

Does that mean you end up writing it back should we see a recovery in equity markets?

It's adjusted through the balance sheet, not through the P&L.

Okay.

Okay.

Thank you.

Thanks.

Let's go to Michele at Goldman Sachs.

Michele?

Good afternoon.

My question was about the production growth in '09.

I wondered if you could quantify that and also if you could give us an update on the PSC sensitivity in this new oil price environment?

Let's go to Andy on production in 2009.

I think we were quite clear in my remarks, in fact, that we weren't going to quantify it beyond saying it was going to grow for sensible reasons, I think.

Let's go to Andy.

Yeah, hi, Michele.

I think what we should look for is the track record that we've established in '08 in terms of volumetric growth.

Underlying growth of around 5%.

In the fourth quarter, top-line growth around 1%.

That was 4% underlying.

What's underlying all of that, is the base is performing as we expect.

The projects are coming on as we've advised you.

And you can look forward, I think, to the same in 2009.

We're clearly going to see in 2009 the benefit of a full year effect of the project startups in '08, which were significant.

In particular the full-year effect of the Thunder Horse ramp-up.

So as we look to sort of forecasting a number.

I think it is actually very difficult because you have two effects going on at the moment.

We have the PSC effect which clearly effects volume with regard to price.

Then we also have OPEC.

So I think a number is probably not the thing to be looking at.

I think the thing you need to judge us by is the operational delivery which continues absolutely on track with what we promised.

We're certainly doing what we said we would do.

Thank you, Andy.

Let's go to Irene, Exane.

Irene?

A couple of questions.

First, you've had a pretty large release of cash from working capital in Q4.

I wonder in the current price environment whether that is all reversed now or whether you anticipate further cash coming out?

Secondly, you mentioned -- Byron mentioned that with an oil price in the 40s your dividend is basically covered by underlying earnings, is there an underlying minimum level of cover that you look for in term of the dividend?

Thank you.

Let me just deal with the dividend.

I think the answer to that is no, but we believe we're well placed.

It's covered well into the 40s as we sit here today.

And we have a lot of momentum.

Costs will fall, revenues will rise as we go forward.

So that level of dividend cover will fall.

And we feel pretty good about it.

Let me ask Byron to cover the question on working capital and working capital release.

Irene, as I alluded to in my remarks, we had a significant seasonal build in the fourth quarter in absolute volumetrics.

We started the end of the third quarter at a lower than normal position.

And we went through the fourth quarter building quite a substantial amount of inventories for year-end purposes.

And as well as in the fourth quarter, we -- we've dealt with our normal exposure to the payment of excise taxes in Germany.

So we're used to the seasonal effect which -- which means that we have weaker cash flows in the fourth quarter, which is offset by a reversal of those factors over the first half of the following year.

And there's nothing that's occurred in -- in 2008, rolling into 2009 to change that pattern.

Great.

Thanks, Byron.

Let's go to Kim Fustier at JPMorgan.

Kim?

Hi, good afternoon, gentlemen.

Just two questions from me, please.

First, you earmarked $2 billion to $3 billion of assets for disposals for this year.

Are these mostly related to the disposal of your US retail business or are there any other assets you intend to divest?

And given the difficult credit conditions, what makes you confident that you can find buyers for these assets?

And secondly, can you give us an update on Tengiz LNG?

When do you anticipate the first LNG cargo from there?

And I believe there's some price renegotiations going on at the moment.

Can you give us an update on that, please?

Thank you.

Certainly some of the divestments are things that we have previously talked about and others are things that we haven't talked about.

And we'll talk about them at the time.

Suffice to say that with capital employed of around $120 billion a very small turnover year on year is what you'd expect.

Frankly, based on where we are in the process, we feel pretty good about the lower end of that number.

We'll see whether we get to the higher end of the number.

We don't think it's a stretch even in the current environment.

It's made up of a small number of packages of assets, Kim.

Because there's nothing really big that we're working through, we've got the confidence that there are counterparties out there who have the cash or the financial capability of acquiring these assets even in the most difficult of environments.

And let's get an update from Andy on Tengiz.

In terms of Tengiz, we continue to make good progress, we have actually got gas into the plant now.

And so we're starting the whole process of commissioning the gas trains and the cooldown of the system.

That probably takes around sort of a couple months to first LNG.

We'll see the first commercial cargos in the second quarter of '09, which is in line with expectations.

Then in terms of the price renegotiations, this is actually a sort of government-to-government issue.

It's between the governments of Indonesia and China and -- and those will proceed at the pace which those governments want to move in.

Great.

Thanks, Andy.

We have a question from the web which I'm going to ask Andy to talk about.

It is about Husky and significant management changes as it relates to oil sands.

Can you comment on the current status of the Sunrise partnership and activities therein from William Lacey of First Energy Capital.

Hi, William.

I think in terms of Sunrise, it goes back to the comments that I made earlier about projects which aren't yet at FID.

It is a good time to really start to push the capital efficiency.

And then show that we're putting the right dollars on the balance sheet.

So that's what we're going to do in 2009.

The projects currently is in the preengineering stage.

That will continue to be worked hard in 2009 to come up with the best project both in terms of its design and in terms of its contracting strategy.

So that's what we'll be working on.

I think hopefully we could look at a decision potentially in 2010, but we need to see where we get to with engineering optimizations.

That's what's going on now.

So the project is continuing as it was currently envisaged.

We have to ensure that we're getting the right inputs to correct the right quality for the future.

Thanks, Andy.

Let's go to Mark Gilman in New York.

Mark, good morning.

Tony, good afternoon.

I had a couple of specific things.

One following up on the prior Tengiz question.

It is my understanding there were delivery commitments that have existed throughout 2008.

I was wondering if there were any losses incurred associated with the fulfillment of those commitments.

Secondly on this Husky issue, what are the provisions, Tony, in the joint venture agreement should the analysis of the project deem a decision not to go forward?

Thirdly, any thoughts on a TNK-BP capital budget for 2009?

And then finally, if Byron could explain the negative ForEx effect in terms of the price drop on crude destined for foreign refineries, my gosh, I'd love to hear it.

I don't understand that effect at all.

Thanks.

Okay.

Let me deal with the first three.

We clearly were providing bridging volumes.

We don't disclose whether we made a profit or a loss on them, Mark.

In terms of Husky there is no provision for not proceeding, clearly we will proceed or not proceed with the project depending on its viability in the day.

What I would say is that you have to remember that we set this up as an integrated oil sands project.

We already have the refinery in place.

It needs to have some investment in it to configure it to run heavy crude.

But the whole idea was to create an integrated position.

And that is because we believe that the margin moves backwards and forwards between the upstream and the downstream.

At lower prices, we capture a very healthy margin in the refinery in the midstream.

So we're fully expecting that we will proceed with the Sunrise project, having got, as Andy said, the cost base back in shape.

Five years ago, this would have been robust.

And we're going to make certain it's robust again this time.

Taking advantage of what I believe will be very strong deflationary pressures in the marketplace.

Finally on TNK-BP, we're looking at a capital program this year between $3 billion and $3.3 billion, which is down marginally from last year, but not significantly.

Let me ask Byron to address the foreign exchange impact -- Iain, I'll ask Iain to address the foreign exchange as it relates to Australia.

Australia and a few other places.

Thanks, Mark.

It's pretty straightforward actually and this is an ever-present effect in our operations.

But the effect of it has tended to be pretty small.

Because the currency movements have tended to be pretty small.

What it arises from is that we have a number of subsidiaries that import oil.

And they price the oil some 30 days let's say, before they actually cash settle the purchase.

So if the dollar strengthens materially between the time of pricing and the time of cash settlement, this will result in a material loss in local currency, which feeds into our local subsidiary result, and then is back translated at an average rate, back into BP's dollar account.

Now this affects Australasia significantly but also the UK and Germany and to a small effect in Iberia and southern Africa.

And finally, a word on why now and why it's so material now.

Obviously there's been very big currency swings in the fourth quarter, particularly the Aussie dollar, which went from about 0.89 to about 0.62 I think it was or 0.65 over the period.

And that's been the single biggest effect.

We have had small gains from this over about four or five years.

But it's not a zero sum game because the very big negative shift occurred when oil prices were very high.

And so the materiality of it was present.

Iain, thank you.

Tony, just back to the Husky thing for just a second.

You've dedicated the refinery to the joint venture.

I don't understand what happens to that if you should decide not to proceed with the oil sands project.

We keep refining products off the market.

That's pretty straightforward.

Okay.

Follow up later.

Thanks, guys.

Let me go to Colin Smith at Dresdner Kleinwort.

Good afternoon.

Sorry if this has been asked.

I lost my line for a couple of minutes.

First of all, congratulations on the reserve replacement record.

I think that's going to be a standout.

I just wondered on the resources whether you could clarify whether or not that includes M&A activity.

And if you can, whether you can just clear up what you've done with Kovykta in that, given your comment regarding the [quotations] with gas.

Thank you.

Yeah.

The resources does include M&A so includes the benefit of the US gas shale transactions we did last year.

And we do not have any resources or, indeed, reserves obviously booked for Kovykta currently.

And just to be clear, did you have resources booked for Kovykta at the end of 2007, so in other words, have they dropped out in this calculation?

They have.

Thank you.

Let me go to what I believe is the final question, Neill Morton at MF Global.

Thanks for taking the question.

Just a couple left.

You made a newswire headline this morning from the press conference quoting you as saying that you were aiming to pay a progressive dividend in 2009.

Could you perhaps clarify that comment if indeed you ever said it at all?

And secondly, on cash neutrality.

Just so that our spreadsheets tally with yours, does that 50 to 60 assume the disposal number you've given and also what does that assume for the GIM for 2009?

Thank you.

It assumes that, it does include the disposals of $2 billion to $3 billion, and it assumes a very conservative number for GIM.

I haven't seen the wire, I'm afraid, Neil, but what I said in my remarks just a few minutes ago was to pay a progressive dividend in line with the underlying earnings potential of the group.

That's what I said this morning, and that's what I've just said half an hour ago.

Okay.

Just as a very quick follow-up, you mentioned flat cash cost across the group in Q3 and lower costs year-on-year in Q4.

Could you perhaps put a percentage figure on that?

Well what we said was $500 million lower in the fourth quarter, year-on-year in our overheads.

As a percent?

Well, you go -- go to the numbers and look at --

Okay.

What the total is.

You can do the math as well as I can.

Okay.

I'll do that.

Neil, if you look in our accounts, you'll see that the administrative and distribution costs 4Q to 4Q are down $500 million.

Okay.

That's the line I was wanting to check.

Thank you.

I think we're done in terms of questions.

Let me say if I can a few comments by way of closing remarks.

I think BP is leaving 2008 with considerable operational momentum which will continue into 2009.

Costs will fall, and revenues, both refining availability and upstream volumes will grow.

We intend to hold the costs to continue our focus on safe and reliable operations.

Continuing our focus on simplification, cost reduction, and increasing the overall efficiency of BP whilst we invest for the future.

And our aim all the time is to strike the right balance for shareholders between returns today by dividend and sustained investment to long-term growth.

That's what we're aiming to do.

I believe that's what we will succeed in doing.

Thank you very much, ladies and gentlemen, for listening.

And we look forward to seeing you all soon.

And most particularly, we look forward to seeing you all on the 3rd of March when we'll be back to review our strategy a year into it.

Thank you very much.