Steady as she goes for BP forecasts

Mar 16 2009 by Andrew Miller, The Journal

Share Watch with Andrew Miller

BP – The company recently held a strategic presentation, where they expressed a more cautious view on the medium-term outlook but delivered a strong message on capital preservation.

First, in E&P, BP cut its medium-term volume growth guidance from 4.3m Barrels of Oil Equivalent Per Day previously to 4.1m by 2013. That’s an average growth rate of only 1-2%, despite good reserve replacement performance.

Unfortunately management didn’t provide much comfort on how the company intends to rectify these challenges, with mergers and acquisitions being an unlikely option in our view given high cap-ex requirements and dividend commitments.

Secondly, BP’s downstream business is improving, with scope for further cost cuts and margin enhancements in this area. Lastly, there was a strong message on dividend preservation.

Management was confident that a recovery in oil price over the next few years and a significant drop in industry costs can underpin the current dividend and the management is prepared to move above the gearing band of 20-30% for a period if necessary.

We think it is a case of choosing between safe dividends or visibility on medium-term growth elsewhere, and in that respect BP’s c.10% yield is still compelling in our view.

Tesco – We are keeping our outperform recommendation on Tesco.

There are still lingering fears that Tesco’s decision to launch a discount range has proved a tactical error, though these are diminishing in the face of the extra footfall the strategy seems to be generating.

The fact that Tesco’s non-food offers managed positive like-for-like sales over the Christmas period, in stark contrast to the competition, should also increase investor confidence that Tesco’s value message is reaching the consumer.

Strategically, Tesco looks well placed to outperform its UK competition in what is set to be a tough year, dominated by value.

Meanwhile, the International business continues to generate impressive returns, a facet of the business which we expect to help narrow the discount between Tesco and the rest of the sector as UK trading conditions continue to deteriorate.

Our revised DCF-based fair value of 381p incorporates a higher cost of equity and more cautious forecasts on both UK and International growth for 2009 and 2010.

Andrew Miller is regional centre head of Barclays Wealth