Lord Browne, chief executive of BP, must be struggling to find space on his mantelpiece these days. Last week, he was voted the UK's most impressive businessman for the sixth time in the Financial Times' annual survey.
Wednesday's trading statement for the super major was, in contrast, a rather dull affair. The negative impact of hurricanes was expected, although the continuing closure of the Texas City refinery will hurt downstream profits in 2006.
The real storm investors need to prepare for, however, is where the sector as a whole goes from here. Soaring crude prices have made stock picking an almost redundant exercise. Back in January 2002, BP's enterprise value to debt-adjusted cash flow multiple of 11 times was 7 points ahead of the lowest rated of the European oil stocks. That gap has since shrunk to just 2.5.
Oil price momentum has underpinned that compression. But analysts expect Brent crude in the mid-$50s a barrel this year, little changed on 2005. Citigroup reckons smaller oil stocks, more leveraged to Brent's swings, need an oil price north of $65 to justify their current rating at parity with the majors. Cost inflation means upstream return on capital employed of 25 per cent last year was roughly the same as in 2000, when Brent traded at $28.
As oil investors turn defensive, BP offers a compelling prospect. It offers an enterprise free cash flow yield of 11 per cent for 2006. New upstream projects will restore production growth and shift it away from lower-margin Russian barrels. Meanwhile, the US gas business provides exposure to a significant market where supply and demand will remain tight for the next few years. And underpinning this, of course, is that mantelpiece.
(FT.com)