英國石油 (BP) 2009 Q1 法說會逐字稿

Welcome to the BP presentation to the financial community Webcast and conference call.

I will now hand the call over to Fergus MacLeod, Head of Investor Relations.

Hello and welcome to BP's first quarter 2009 conference call. My name is Fergus MacLeod from BP investor relations. Joining me today, is Byron Grote, our Chief Financial Officer. Before we start, I'd like to draw your attention to this next slide. During our presentation today, we will make forward-looking statements. Actual results may differ from these plans or forecasts for a number of reasons, such as those noted on this slide and in our SEC filings. Thank you and now, over to Byron.

Thank you, Fergus. And good day to those joining us on this call. Before we start I'd, like to draw your attention to the changes that we've made in our stock exchange announcement. We have moved to both simplified reporting and to align it more closely with our peers, as well as better reflecting how management looks at the business. I hope you'll find these changes helpful.

As usual, I'll begin my review of the quarter with the trading environment. The table shows the percentage year on year changes in BP's average upstream realizations and refining indicator margin. Our liquids realization of $41 per barrel, was 20% lower than last quarter and less than 50% the level experienced a year ago. Our gas realization was around 30% lower than the previous quarter and 40% lower than 1Q last year. The sharp decline in Henry Hub prices has materially impacted both these realizations and our 1Q results, since over 10% of BP's total hydrocarbon production is US gas. Taking both oil and gas together, our total average hydrocarbon realizations were down 23%, compared with 4Q '08 and were 50% lower than a year ago. The refining indicator margin of $6.20 per barrel was up 20%, compared with the previous quarter and more than 1/3 higher than 1Q '08, although BP's actual margins were lower. I'll come back to this in a moment when I talk about refining and marketing.

Turning to the financials. Our first quarter replacement cost profit fell to $2.4 billion, down approximately 60% from last year, reflecting the much weaker environment. After adjusting for fair value accounting effects and nonoperating items, our underlying result was $2.6 billion. This included a negative pretax consolidation adjustment of $400 million. Finance costs have increased as a result of lower expected returns on pension plan assets. First quarter operating cash flow was $5.6 billion. The $0.14 per share dividend announced today, which will be paid in June, is 4% higher than a year ago. The sterling dividend is up by 40% year on year, reflecting the stronger dollar.

In E&P, we reported a pretax replacement cost profit of $4.3 billion for 1Q, down $5.8 billion compared with last year, again reflecting the significantly weaker price environment. The 1Q result had a $470 million favorable impact from fair value accounting effects and nonoperating items. Adjusting for these items, our underlying result was $3.9 billion, compared with $10.7 billion in 1Q '08. Reported production exceeded 4 million barrels of oil equivalent per day, more than 2% higher than a year ago. Adjusting for the impacts of production sharing agreements and the effects of OPEC quarter restrictions, underlying production rose by more than 4% compared with a year ago.

The quarter also benefited from a strong gas marketing and trading contribution and increasing momentum in reducing costs, with unit production costs down 11% compared with 1Q '08. As projected, after a loss in 4Q, TNK-BP delivered net income over $100 million due to the absence of the material export duty lag and impairments experienced last quarter. This demonstrates TNK-BP's ability to remain profitable even in the weak price environment that we've seen in the first quarter. TNK-BP's production was up 3%, compared with 1Q '08. Refining and marketing pretax replacement cost profit was $1.1 billion. This included a charge of $350 million for nonoperating items, related mostly to restructuring costs. Excluding these items and after adjusting for fair value accounting effects, the underlying result was $1.5 billion. $1 billion better than a year ago despite a weaker environment.

As I said earlier, despite the improved refining indicator margin, our actual margins were worse than in the same quarter last year. This is because upgrading margins were particularly poor for this quarter, due to narrowing gasoline distillate and light heavy spreads, which adversely impacted our highly upgraded facilities. Petrochemicals margins were also significantly worse than a year ago. These environmental effects were more than offset by substantially improved operational performance in refining, a very strong supply and trading contribution, and significant cost improvements. Costs are materially lower than 12 months ago and lower than the fourth quarter, reflecting continued momentum from both our simplification and efficiency efforts and the absence of major restoration and repair costs.

In other business in corporate, the first quarter result was a net charge of $760 million, including $320 million of nonoperating items. In line with previous guidance, the underlying charge for the quarter was $440 million. The result reflected a reduction in corporate costs, which was more than offset by lower contributions from the other businesses and retention of additional overhead costs in OB&C for more effective cost management. In alternative energy, we're continuing our disciplined approach to the business. For example, in solar, we are refocusing manufacturing activities in order to reduce unit costs and improve competitiveness.

Turning now to cash flow. This slide compares our sources and uses of cash in 2008 and 2009. Operating cash flow was $5.6 billion, reflecting the weaker environment. Disposals provided a further $300 million. The normal first quarter reduction in working capital did not occur this year, as we retained inventory and storage at quarter end to benefit from the strong contango structure of the market. We used this cash to fund $5 billion of cash capital expenditure and distributed $2.6 billion in dividends. Our net debt ratio of 23% at the end of 1Q remains at the lower end of our targeted band. We issued $4.6 billion of bonds during the quarter, accessing very favorable rates. And continued to maintain a higher than normal level of cash as contingency against the uncertain economic environment.

In closing, I'd like to say a few words regarding the outlook for the rest of the year. Consistent with earlier guidance, we expect growth in production in 2009. We expect the quarterly phasing of production to reflect the normal seasonal effects associated with turnaround activity in the second and third quarters. Refining availability in 1Q was 92%, up by more than 4% on a year ago and is expected to remain higher than in 2008. Second quarter scheduled maintenance is expected to have a greater impact than in 1Q. Costs in the first quarter, which are normally lower than in subsequent quarters, were down by more than $1 billion compared with 1Q '08. Reinforcing our confidence that 2009 costs will be materially below the 2008 level.

Capital expenditure is now expected to be less than $20 billion and we continue to expect $2 billion to $3 billion in divestments, with the majority occurring towards the year end. Overall, our strategy is on track. We're delivering upstream growth and we're turning around our downstream business. We're driving greater efficiencies and making every dollar count. Fergus and I would now be delighted to address any questions.

(Operator Instructions)

Thank you operator. We've got the first question here coming from Theepan at Morgan Stanley. Theepan, good afternoon.

Yes, hi, good afternoon, gents. Just two questions, actually. Certainly, it seems you're making great strides in terms of reducing costs in the business. And you mentioned, Byron, $1 billion year-on-year. I was wondering if you could, given some of the components of that in terms of restoration costs, deflation and the supply chain? I just was wondering whether you could sort of quantify that or break that down between the upstream and the downstream? Secondly, I was just wondering, I think several times in the press release, you talk about a strong supply and trading environment. I was wondering, rather than sort of giving an absolute number, if you could sort of quantify that on a relative basis, let's say to Q4, what the benefit would be -- or has been rather? Thank you.

Okay. Theepan, let me address the questions in order. As far as the cost savings broken down between the two business segments. If you go back relative to the first quarter of 2008, about 2/3 of the improvement sits in R&M. But you need to remember that refining and marketing was still progressing some major repair and restoration activities in 1Q '08 and 1/3 of it showing through in E&P. So 2/3, 1/3 would be a good rule of thumb.

As far as the trading environment, and how that's impacted our contribution from our supply and trading activities. I just want to remind everyone that the contribution does tend to vary and sometimes quite significantly from quarter to quarter, depending on both the environment and our ability to capture market opportunities. There's no doubt that the first quarter saw some very strong overall contributions from our supply and trading operations. And that was particularly in refining and marketing, where we benefited from the strong contango structure of the crude oil market. And although you didn't specifically ask me to provide any quantification, maybe I can help out a bit by the following. That -- it was about $500 million higher than what we would consider the normal range of quarterly volatility. And as a consequence, we don't anticipate that this level of contribution is likely to persist in subsequent quarters. Having said that, I want to emphasize that there were a number of factors that contributed to the strong refining and marketing result, against what was a weaker margin environment. The greater manufacturing availability, significantly lower costs, as well as the higher contribution from supply and trading.

If I turn to exploration and production, the contribution from our gas marketing and trading activities was at the high end of the normal volatility range. So it was high but it was not outside of the ranges that we normally see there. And a final comment on this, is that there's -- the same persistent steep contango conditions that did contribute significantly to the strong 1Q trading performance in R&M, were mirrored by the weak front end oil prices, which negatively impacted our exploration results. So, there is a bit of a swing in roundabout and how it impacted the overall corporate results. I hope that answers your question, Theepan.

No, that's great, very clear, thank you.

Thanks, Theepan. The next question is from Jon Rigby at UBS.

Hi, just one question, actually. It's to do with what you're investing, both into OpEx and CapEx. And I kind of jump off from the exploration charge, which is quite low this quarter. And it just raises the issue that we saw earlier on this decade, when companies indulge in very aggressive cost cutting, is that it looks very good for a year or so. And then, the problems come home to roost a little later when it's clear that probably not enough has gone back into the business to sustain the business or to grow the business. How certain can we be, at this stage, that while what you're doing at the moment is having a good bottom line effect now, is not going to have sort of a significant negative impact in two or three years time? And the same comment for the CapEx, as well.

Well, we're very mindful of the tradeoffs that are involved here and we're certainly keeping an eye on them. We've said and continued to say that it is our intention to continue to invest enough to grow the business and nothing has changed from what we talked about in March. As far as the actual dollars spent, it's not so much how many dollars you spend but what you get for those dollars. And in a deflationary environment, as more and more traction is being reached, you'd expect that the costs would be coming down with no impact whatsoever on the overall forward opportunities of the group. If I could come back to the point that you made about exploration expense in the quarter?

Yes.

The exploration expenses, if you look back over the course of the last four years, they've averaged about $800 million per year or $200 million per quarter. So if you're looking at the comparables of 1Q '09 versus 1Q '08 and 4Q of '08, those were higher than normal because the nature of this item is that there's cost stream as events occur. And of course, less is good here to the extent that we are successful in exploration activities, then the expense is lower. So this doesn't indicate any reduction in activity or the first quarter is indicative of some very successful exploration activity.

That's good cost cutting.

Good cost cutting, that's what we're aiming at. And one of the things that I think Andy and Iain and Tony all mentioned during the course of this [GRAJE] presentation, but I'll remind everybody of it again. And that is that we are doing no cost cutting that in any way would jeopardize the safety of our employees or the integrity of our operation. That's where things begin. And to the extent that there are inefficiencies in our overhead structure or the way in which we're carrying out our work, that provides ample opportunities to take out costs without impacting the ultimate delivery.

Okay, thank you.

And I might add to that, that it's categorically not the case that we're curtailing investment in exploration. Indeed, in the first quarter, in the central Gulf of Mexico, Lease Sale 208, we were in fact the high bidder on 27 blocks, success rate of 71%. And in Egypt, we also secured significant new acreage. So, a low exploration write-off can be a sign of success because it's not a measure, actually, of the investment that's going in, rather than the write-off. Now, moving on to the next question, which comes from Lucy Haskins at Barclays. Good afternoon, Lucy.

Afternoon and congratulations again on the operation improvements we're seeing. Could I ask about the DD&A costs because I think you indicated, at the fourth quarter, we'd expect to see about $1 billion more than this year, which doesn't seem to be evidenced from these 1Q figures? So, I just wondered if you were going to off your guidance in terms of that charge or whether there's just a difference in terms of the phasing?

Well, there definitely is going to be a difference in the phasing, Lucy. $1 billion more looks like it's going to turn out to be on the high side. But I'd like to see how things progress during the second quarter and we will update you on further guidance at the mid-year. But for now, you should expect that there indeed is going to be a trend for a DD&A charges to go up, partially consistent with the fact that we're producing more. One of the things that's running counter to that would be foreign exchange effects. To the extent that we have any capital denominated in nondollar terms, obviously, that's translating to be fewer dollars in the DD&A charge.

Great, okay, thanks.

Thanks, Lucy. Our next question is from Mark Iannotti at Bank of America. Mark.

Afternoon, gentlemen. Just, unfortunately, another question on costs. Can you just remind me what your average cash costs are in your US gas business in light of the current pricing environment there? And also, maybe just remind me what investment plans you have for your tight gas acquisitions you made last year?

Well, we don't provide information on specific cash costs at a strategic performance unit level. So, I can't help you on that question. As far as investments in the acquisitions that we made last year, those are continuing. All of the early signs are extremely positive of the work that we're doing on the shale opportunities that we acquired from Chesapeake. The costs have been less and the delivery has been better.

Okay. Can I just reword the question another way? Do you think there's any chance you could see shut-in production if prices don't improve above the $3 mark that we're seeing today?

Well, let's wait and see on that. It's not our intention at the current time. If you're asking in general across the industry as a whole, I suspect the answer to that is, yes. But if you're asking about our own operations, then certainly, I wouldn't have any comment about that at the current time.

I think one of the things that might be helpful to you is what we're doing with respect to our US gas business. And again, although we don't normally talk about performance on an SPU by SPU basis, since there is so much interest in North American gas at the current time. I think it would be useful for me to confirm that, in the first quarter environment, that our North American gas business was profitable in spite of the prices that existed at that time and the netbacks into the regions in which we produce. And of course, in light of the even weaker environment that we're experiencing in the second quarter, the team there is taking steps to restructure their activity and further drive down costs, like we're doing everywhere in the group. But the challenge is even greater there and Andy Hopwood and his team are approaching it vigorously. The issue in the industry as a whole, as we've talked about in February and March and now again today, is the fact that we need to get costs down to a level consistent with the environment. And many costs are still stuck at higher levels and we're doing everything we can to bring them back in line to ensure that we have profitable operations, both oil and gas everywhere around the planet.

Great, thanks very much.

Thanks, Mark. Next question is from the US from Robert Kessler at . Simmons & Co. Hi, Robert.

Hell, good afternoon, gentlemen. I wanted to ask you a little bit about production volumes from the Gulf. Thunder Horse Contributing well, it looks like, to BP. Better late than never but it looks to be, if anything, outperforming at this point. Atlantis, meanwhile, seems to have underperformed quietly. And I was wondering if you might update us on that one? It looks to me like it peaked at about 114,000 barrels a day oil of equivalent last March and has since declined by some 30% to 40% by year end last year. I know you've got, I believe, the North Flank coming on for an incremental 20 later this year. But any incremental thoughts on some extra pressure maintenance and whether or not that field might be underperforming your prior expectations?

Well, I don't really know how to go at that one. You're absolutely right. The US Gulf of Mexico is performing extremely well, it is exceeding our expectations. And the very strong performance of Thunder Horse on ramp up is a key element of that. It's probably not appropriate to talk about operations on a field by field basis at this point in the year. We have had some scheduled maintenance on some fields in the recent weeks. But I think I'll leave it as saying that, overall, the performance of the Gulf of Mexico portfolio is continuing to exceed our expectations. And that's true as we move into April.

Well, without getting into the near term then, field by field, do you ever expect Atlantis to reach its peak design capacity?

As I said I'm not going to talk about that on a field by field basis at this point.

Okay.

Maybe a more helpful remark would be to tell you the Gulf of Mexico aggregate production is over 400,000 barrels a day at the moment.

Okay, thank you.

Thanks, Rob. Back to the UK and to Jason Kenney at ING in Edinburgh. Jason, Hi.

Hi there. And I've got a follow up question on the CapEx. I just wondered, with the CapEx rephasing, maybe prioritization, if there was any impact from partner drag in that downscaling of commitment there or number of dollars at least? And in particular, is there any kind of repriortization with respect to Angola and development activity near or medium term there? Secondly, on TKN-BP, if I may, last week reportedly interested in [Zachmenai.] I was just wondering how important it was for TKN-BP to look externally for opportunities to underpin medium term growth?

Jason, I'll take the CapEx question first. Let's remember, we've just modified it from $20 billion to $21 billion, down to less than $20 billion. So this is, at this stage, a pretty minor adjustment to the CapEx picture. And it is partner drag and repriortization part of that? The answer is, yes. As well as our current expectations of the pace of sector cost deflation. So, it's a combination of those three. I would say that the fact that we're spending a little bit less has no implications on the forward guidance on production that we provided you in March. And as far as specific projects, I think it would be best to defer that in the second quarter when Andy Inglis can update you on what's going on across the E&P picture at large. Just recognizing that it's only been a bit more than a month since he last talked with investors.

As far as TKN-BP goes, I think you should consider the opportunity we're progressing as just one of the benefits of having a presence like we do in Russia through TKN-BP. In this particular case, another company offered a higher value but we'll continue to look for good value opportunities to invest in the region. And do we need it? The answer is, no. But if there are good opportunities out there, then TKN-BP is a perfect vehicle in which to access them.

And could I maybe just follow up on TKN-BP? In the past, you've mentioned you would look to float an interest. Maybe market conditions are not correct for that. But certainly, the disclosure and reporting quality at TKN-BP don't compare against something like Lukoil, still quite poor. Maybe this is the time to be building the track record in disclosure there, in preparation for flotation in a couple years time maybe.

Your point is also noted but also, the second part of that, which is, we're not looking to do anything of that sort, especially with existing market conditions. But we're not really looking to do anything of that sort until end of 2010 at the earliest.

Okay, many thanks.

Thanks, Jason. This next question is following up on Robert Kessler's earlier point. Without getting into quarter by quarter field by field production numbers, I could draw your attention to something that isn't public domain, which is Atlantis North Flank is one of a number of options for further developing the Atlantis area. There has been a successful appraisal well in that area. And think we have said publicly, there's an intention to turn that back later in 2009. So, Robert, happy to talk with you more than on that, if you'd like, after the call. Moving back to the telephone. We have Neil McMahon at Bernstein. Good afternoon, Neil.

Hi, good afternoon. Just got a few questions. First of all, my apologies if you've gone over this in detail. I had to step off the line. Just looking at your gas and power trading, maybe you could go into that in detail. Exactly what was one-off on the gas and power trading side in Q1 and what was we should think about that for the rest of the year? If there was any maybe gas hedging activity that was going on from your North American operations? The second one, is really to get an update in Tangguh. Some press reports suggest that the first deliveries of LNG, relevant startup of the plant, so the actual making of LNG and shipping of it; are not going to happen until into the third quarter, which suggests that it's been delayed from earlier in the year. And lastly, just going back to TKN-BP, looking at the situation on the ground in Russia, right at the minute. If you can give any guidance in terms of the nearer term decline rates that could be going on? And maybe some activity levels that are going on with oil service companies, to get an idea what your exit volumes might for this year and into next year? Thanks.

Well, I did cover gas, power and trading. And I indicated that, although the result in the first quarter was strong, it was not outside of the normal band of volatility in which an inherently volatile activity would produce. And no, there's no gas hedging, if you're talking about forward selling of gas volumes involved in that. I'm going to let Fergus talk about Tangguh. As far as TKN-BP, there's no further guidance beyond what Andy provided at the mid-year. We're continuing to invest in TKN-BP at the rates that were indicated there. With the ruble as weak as it is, a dollar goes a lot further than it did at this time last year. And generally, we're in a relatively flat spot in the production volumes there, until some of the greenfield projects kick in, in a few years time. Fergus?

Yes, a very quick update on Tangguh. Tangguh is going well. As we've been saying for some time, that commercial deliveries will take place later this year. We're going to build up progressively to total capacity of 7.6 million tons per annum, with the first two trains. The site is capable of going well beyond two trains and it is the intention to build up plant capacity through time, as we build up new sales commitments to support that. So, the project is going well. There will be actually an update of our major projects later on our Website today, Neil, which you might be interested in having a look at.

And will that give any indication, Fergus -- it's just really on rampup timing. Obviously, with these things, with different trains they can take some time to get up to full capacity. And it's just to get an idea of what to expect really this year, since LNG is the topic on the market and on the SEA. So, just to get an idea of really how much it's going to hit this year relative to next year?

I think the production guidance for this year, Neil, and I remind you, obviously, that production will grow in aggregate for BP. We don't go beyond that in terms of specific detail. And of course, you've seen that in the first quarter, production did grow by 2% on a reported basis. More than 2%, approximately 4% on an underlying basis. So, I can't really go beyond that, Now, moving back to the United States, Mark Gilman of The Benchmark Company. Hi, Mark.

Guys, good afternoon. I've got a couple of things. One of which is a clarification. Byron, the $1 billion in cost reduction, am I interpreting it correctly that that would include the absence of the repair and restoration costs in the year ago period?

Why don't you list our all your questions Mark, and then we will take them.

Okay, second, can you quantify the OPEC quarter impact? Third, are there any plans, presently, regarding the development of the West Nile deep water discoveries? And then fourth and finally, can you talk a little bit about natural gas pricing and in particular, with reference to the Trinidad LNG, as well as the UK? The prices were quite a bit lower on realized basis than what I was looking for. It would seem to me that you're very heavily tied to either spot market price levels on a national balancing point basis in the UK and perhaps Henry Hub for Trinidad LNG deliveries. But could you give us some color on that, Byron, please?

Okay. I'll cover the first, second and fourth and Fergus will deal with the third. As far as the breakdown in the cost of $1 billion, these are broad segmentations but about 30% of it was driven by ForEx. Remembering, the dollar strengthened quite substantially between first quarter of last year and the first quarter of this year. About 30%, as you're suggesting, Mark, is a consequence of the absence of last year's restoration and repair costs, primarily in refining and marketing, a bit of it in E&P. And then, the other 40% comes from the restructuring and simplification efforts, the improved operational efficiency and the initial benefits of our focusing on third party costs. So, the whole mixer bowl of initiatives that we are progressing, as a team, are good 40% plus of the overall.

As far as OPEC quota go, that was about 80,000 barrels a day impact versus the first quarter of last year. And on natural gas pricing, there are various destinations for the production volumes that come out of Trinidad. But two important contributors to that would indeed be Henry Hub prices and the UK pricing points. So, what you're seeing is a mix of that and some other destinations.

Yes, Mark. And your question on Egypt. Again, on Egypt, as I said earlier to Neil McMahon, there is an update on all our major projects on the Website later today. But just to give you a clue to our attitude toward Egypt, I mentioned earlier, there was a major acquisition of new acreage in Egypt in February. This year, when we submitted bid for block two in the offshore Nile delta. And we won that block and I think that gives you some indication of where we're going with Egyptian gas, which is a potential area of continued growth for us. Coming back to the UK, we have a question I think from Irene Himona at Exane BNP. Good afternoon, Irene.

Good afternoon. I had a question on costs if I may. You mentioned over $1 billion of cost cutting in Q1. At the strategy meeting, you mentioned a targeted annual cost reduction of around $2 billion, I believe. So, I wonder if there are any conclusions we can draw from that on the full year target? And then, still on costs, if we think about the sources of the cost reduction, on the one side, we have the benefits of the forward agenda. And on the other side, we have reductions in your contracted supply costs. Can you say a little bit about how the $1 billion perhaps played in Q1? And my final question, in your nonoperating items, you had a $263 million charge in the R&M business from restructuring. Do you anticipate that to continue in the rest of the year as your restructuring of the business continues? Thank you.

Well, let me deal with the last one of those first. As far as the restructuring goes, we've been on a program now since the middle of 2007, trying to align the organization much better for the task at hand, to simplify it and to reduce overhead quite substantially. And what you're seeing reflected in the first quarter is continuation of those efforts. I suspect we'll see a bit more over the course of 2009 but much of the work is done. And this is one of the benefits that we've had of having addressed this and initially, getting the wheel in motion back in the middle of 2007. We are now actively involved in all fronts. And the timing has turned out, obviously, to be very good as the market environment has become more difficult. The other question?

There was a question I think, Irene, about whether we're going to change the indication we've previously given that we'd expect around $2 billion in cost reduction for 2009, in light of having achieved more than $1 billion in the first quarter.

Well, I think we need a couple quarters of progress there. We're delighted with what we saw in the first quarter, much of it, we're confident, is sustainable. But rather than give an update, we'll just speak to the fact that we said at least $2 billion and we've delivered more than $1 billion in the first quarter So, we'd expect to do much better than the $2 billion that we outlined. By how much? I think we can have a better sense of that when we get to the mid-year. And was your other point; How is cost reduction split between upstream and downstream?

No, it was really thinking about the renegotiation of your supply contracts versus the restructuring through the forward agenda. In other words, are you already seeing an impact on your cost of supply, separate from the restructuring you started back in 2007?

Well, the answer to that is, yes, Irene. And perhaps, it might be helpful -- I'll focus on exploration production, I clearly, could be talking about other parts of the business as well. But if we look down exploration production and of course, some of these costs are capital costs, some of them are operating costs. But things kind of split into three different categories here. And there are areas where we're seeing substantial deflation. And those are, for example, in land rigs and jackups, where there are shorter term contracts and where the supply/demand imbalance now has started to drive significant deflation. So, that's one category of things. A second category of things is where, I'd say, we're seeing moderate deflation in their steel bulk commodities, marine and seismic. Where we are now renegotiating costs and able to access a pass through of either lower base costs themselves, as is the case in commodities, or where again, we're starting to see the emergence of a supply/demand imbalance.

And then, finally, there's the area where we're seeing limited cost reduction at the current time. And that fits in the high end services. Well, the sectors with order backlogs and places like ultra deep rigs, where either you've got the contracts that are in place out through 2009 and in some cases, beyond or alternatively, as I said, you've still got order backlogs in place. But supply and demand imbalance will work on even these, as well in due course. So it's a mixed bag right now but it is responding and those areas that tend to respond most quickly, we're seeing lots of deflation come through. And then, there's the whole range of cost across the group at large, dealing with every third party provider. And with the current market conditions, we're finding we're able to get good traction there. Our overall costs, I can't break it down between what's third party and what's reduced number of units but I'll tell you that both are contributing.

Thank you very much.

Thanks Irene. We now have a question from the Internet, which is; In light of the good progress you seem to be making in terms of cost reduction and achieving efficiency in your capital program, are you revising your guidance for the oil price required for cash break even?

Well, no, we're not. The first quarter results reflect the progress that we're making in delivering better operating performance from our assets and reducing cost, as I've already said. But it is only one quarter and in spite of the fact that it's an important step in the right direction and we definitely have plans to do more. So the cash break even guidance that Tony provided in March, and remembering that was just last month, is unchanged. I'd note, that we built into our guidance, at that time, a certain level of cost reduction. So some of what we're seeing coming through was already factored into our plans. But to the extent that we're able to achieve more and achieve it faster, then, that's incremental to it. And again, we'll update you further when we talk about our 2Q results in July.

The next question from the telephone is from Neill Morton at MF Global.

Yes, thank you, good afternoon. I've got no questions left with regards to costs. Just one left on financials. The charge in the first quarter was higher than normal, $368 million and that was mainly a swing round in the pension line from income to costs. Is that number a number we can use ratably in forward quarters? Thank you.

The answer is, yes. And let me just give a little bit of background to that because I know pensions are an item that's on the minds of many investors today. And if I just can cover it in a little bit wider swath. At the end of 2008, our funded pension plans were almost 100% funded in total. With our largest plans, here in the United Kingdom, over 100% funding. And if I take a look at where we were at the end of the first quarter, there is really no material change on that.

From an income perspective, the reduction in asset values versus a year ago is creating an increment of about $200 million per quarter of net finance costs relating to pension and post retirement benefits. And you can see that, as I think you've probably already noticed Neill, in the group income statement in the SEA. The reduced returns were impacted, not only by the fact that assets themselves have come down year on year, but also the fact that our biggest plan is in the United Kingdom. And so, we've got a sterling translation of those assets into dollars, which relative to the GBP2 per $1 exchange rate that existed a year ago, also has an impact on that. And then, a consequent impact on returns that show through on the finance line. The net charge, then is made up of this $200 million incremental charge, offset partially by the fact that we're experiencing lower conventional interest charges in the course of the first quarter. So, net-net it's a higher charge but with lower interest rates offsetting a fair portion of the higher pension return charge.

That's great, thank you very much.

Thanks, Neill. And we've got another Web question, which states that you mentioned in your prepared remarks that working capital at the end of the first quarter was higher than it would normally be as a result of the contango structure of the market. Would you expect to see that higher inventory level liquidated over the balance of 2009, would that impact your cash flow from operations?

Well, we'd actually expect it, probably, to be drawn off during the course of the second quarter. Since we've now seen the sharp contango structure, steep contango structure that we had in the first quarter return to a flatter structure. We've built a bit more than $1 billion worth of incremental working capital at the end of the first quarter in order to capture the benefits of that. And as we sit here today, we'd expect that to be returned to a more normal level by the end of the second quarter.

Thank you. And I think we've got one patient questioner waiting on the telephone, which is Iain Reid from Macquarie. Good afternoon, Iain.

Hi, thanks a lot gentlemen. Just a quick question about your liquid realizations in Europe. I think you mentioned, in the last quarter, they were low because of weak NGL prices. And now, they've popped up to a premium to [BRD.] Is that the reversal of this weakness in NGL market and how should we look at that going forward?

Fergus may have something to add to this but the number to ignore in this, I think, is the fourth quarter number. It had some unusual items in it. The second -- the first quarter of 2009 is a much more normal situation. So I would sort of throw 4Q out of the box and progress from what you see the number this quarter.

Yes, you've got your finger right on this one. The real issue is that in the fourth quarter of 2008, realizations were very depressed in Europe relative to the benchmark and we've reverted to a more normal relationship in the first quarter. And that's the relationship you should think about moving forward.

And on the NGL price issue?

That was part of the unusual situation. Timing of liftings also came into it but there were a whole bunch of things, which depressed realizations in the fourth quarter.

Okay, thanks.

Great. Well, thanks very much, indeed. That sums up all the questions from the telephone.

Okay. Thanks, Fergus.

And thanks to all of you. I'd just like to make one final comment here. We remain focused on striking the right balance for shareholders between investing for future growth, continuing to provide current returns via the dividend and utilizing the capacity of our balance sheet, while the industry cost structure adjusts. The results today and particular, the much lower 1Q costs, which we've talked about in quite a bit of detail, reflect the early progress that we're making. And we'll be looking to update you on that and a number of the other issues, which we've discussed in the course of our Webcast, in July. I want to thank you for joining and for your questions.