BP

BP PLC Form 20-F Summary: Fiscal Year Ended December 31, 2002

Business Context and Reporting Period

This filing is an Annual Report on Form 20-F for BP p.l.c., a global oil and gas company incorporated in England and Wales. The reporting period covers the fiscal year ended December 31, 2002. The Group operates through four main segments: Exploration and Production (Upstream), Gas, Power and Renewables, Refining and Marketing (Downstream), and Chemicals. The 2002 results reflect the full-year impact of the Veba Oil acquisition in Germany and the integration of ARCO and Burmah Castrol, which were acquired in 2000.

Key Financial Metrics

Note: BP reports under UK GAAP. Replacement cost profit is a key management measure that excludes inventory holding gains/losses to reflect underlying trading performance.

Material Changes vs. Prior Period

• Profit Decline: Replacement cost profit before exceptional items fell 43% to $4.7 billion in 2002 compared to $8.3 billion in 2001. This was primarily due to a challenging trading environment, specifically significantly lower natural gas prices and refining margins (which were roughly half of 2001 levels).
• Turnover Growth: Group turnover increased 3% to $178.7 billion, driven by higher production volumes and crude oil realizations, partially offset by lower natural gas prices.
• Acquisitions: The 2002 results include the full impact of the Veba Oil acquisition (completed in two stages in 2002), which strengthened BP's position in Germany and Central Europe. Capital expenditure and acquisitions totaled $19.1 billion, including $5.0 billion for Veba.
• Production: Total hydrocarbon production increased 2.9% to 3,519 thousand barrels of oil equivalent per day (mboe/d), with crude oil production up 4.5% and natural gas up 0.9%.

Guidance, Outlook, and Risks

• Outlook: Management maintains a cautious view for 2003 due to economic uncertainty and geopolitical risks, particularly regarding Iraq. While US gas markets appear strong, crude prices and refining margins remain vulnerable.
• Investment Strategy: BP intends to increase investment (excluding acquisitions) to $14.0–$14.5 billion in 2003, focusing on five new upstream profit centers: Deepwater Gulf of Mexico, Trinidad, Angola, Azerbaijan, and Asia Pacific LNG. The company plans to divest $3–$6 billion of assets in 2003.
• Risks: Key risks include volatility in oil and gas prices, political instability in emerging markets, environmental liabilities (including decommissioning and remediation), and regulatory changes regarding climate change (Kyoto Protocol) and emissions.
• Accounting Changes: The Group adopted FRS 19 (Deferred Tax) effective January 1, 2002, resulting in a prior year adjustment reducing shareholders' interest by $9.2 billion and reducing current year profit by approximately $750 million.

Investor Verification Checklist

• Replacement Cost vs. Historical Cost: Verify the reconciliation between reported historical cost profit ($6.8 billion) and replacement cost profit ($4.7 billion) to understand the impact of inventory holding gains ($1.1 billion) on reported earnings.
• Impairment Charges: Review the $1.4 billion in impairment charges recognized in 2002 (including Shearwater, Rhourde El Baguel, and Indonesian assets) and assess the assumptions used for future cash flows (Brent oil price of $20/bbl, Henry Hub gas price of $3.20/mmbtu).
• Environmental Provisions: Examine the $2.1 billion provision for environmental liabilities and the $4.2 billion provision for decommissioning costs, noting the sensitivity to discount rate changes (2.5% in 2002).
• Refining Margins: Analyze the significant decline in the Global Indicator Refining Margin to $2.11/bbl in 2002 (down from $4.06/bbl in 2001) and its impact on the Refining and Marketing segment's profitability.
• Debt Profile: Confirm the net debt position of $20.3 billion and the target debt-to-equity ratio range of 25%–35% (adjusted for acquisition amortization).