BP (BP.) delivered on the widely anticipated resumption of its dividend when it released fourth-quarter results, but scaled back on production goals for 2011 and announced plans to sell half of its US refining capacity. While we're encouraged by how BP is moving forward with asset sales and plans to instill a new safety regime, we're still concerned about longer-term challenges on executing growth plans and uncertainty over future regulatory and legal penalties.
BP resumed a quarterly dividend of $0.07 per ordinary share to be paid March 28. Adjusted replacement cost profit for the fourth quarter of $4.4 billion was flat with year-ago adjusted earnings. BP is well ahead of asset sale goals of as much as $30 billion by year-end 2011, with agreements for $22 billion in sales already signed by year-end 2010. The firm also plans to sell two US refineries--Texas City and Carson--for more than $3.7 billion, as estimated by BP's refining head, Iain Conn. BP has moved forward with new exploration agreements and licences in Brazil, South China Sea, Indonesia, Azerbaijan, the UK, and recently Australia and its contested alliance with Rosneft.
However, BP has several longer-term challenges and uncertainties. Our concerns about its execution on growth plans are evidenced by lower-than-expected oil and gas production. Fourth-quarter production declined 9% from year-ago levels to 3.67 million barrels of oil equivalent per day versus our estimate of a 6% decline. BP expects a further production decline to 3.4 mmboe/d in 2011, warranting a review of our model assumptions. Not surprisingly, BP cited lower Gulf of Mexico production as one of the reasons behind the production decline, along with the impact of asset sales. We believe challenges in securing regulatory approval for drilling permits in the Gulf of Mexico will persist for years. The firm took another $1 billion charge for oil spill-related costs during the fourth quarter, bringing the total oil spill charge for the year to $40.9 billion. BP now estimates claims against its $20 billion claims fund to range between $6 billion to $13 billion based on claims data, insurance industry benchmarks, and management judgments. However, uncertainty over the final claims amount and longer-term legal and regulatory penalties persists.
Catharina Milostan is an Equity Analyst with Morningstar.