Barclays 060710

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EQUITY RESEARCH Energy & Power | European Integrated Oil | 7 June 20

BP

Retaining financial flexibility

We believe BPs management took the right position with its recent update to

investors. Whilst recognising the importance of dividends to investors the company

also focused on the importance of long-term shareholder returns. These returns will

be best served by the group restoring its operational credibility and rebuilding its

reputation in the US. The company as yet cannot quantify the total costs associated

with managing the spill, and we believe that the decision on the 2Q dividend may be

contingent sensibly enough on the success of the containment options currently

being pursued. We are cutting our price target by 40p to 610p to reflect fine

provisions and higher spill costs. Our 2-Equal Weight rating reflects the continuing

uncertainty that is likely to overhang the groups Gulf assets, which comprise some116p of that value.

Caution on gearing raises risk on dividend: On the call the company said it would be

looking to keep debt to capital at the lower end of its 20-30% range. In this report we

present our estimates of gearing under a range of oil price and cost scenarios. If

containment costs were to rise above $6bn this year we would see significant risks to

our current expectation of a sustained dividend.

Discount sector: BP is trading at a 29% discount to our price target, in line with the

sector average. Inside we look at BPs sensitivity to discount rates we currently use

10% nominal every 1% increase in discount rate would cut our price target by

approximately 10%. Cost of equity may be another consideration in terms of the

appropriate level of the dividend for the long term.To accompany this report we also are publishing an updated copy of our Oil Spill

Flexor that allows investors to make their own assumptions around the ultimate costs

and liabilities facing BP, which we now estimate to be over $17bn.

Financial and Valuation Metrics GBP

FY Dec 2008 2009 2010 2011 2012

EPS 0.75A 0.49A 0.66E 0.74E 0.93E

Previous EPS 0.75A 0.49A 0.67E 0.76E 0.93E

EV:EBIDA, x 4.4 5.5 4.6 4.0 3.3

P/E N/A N/A 6.5 5.8 4.6

FCF yield, % 15.5 4.8 9.4 11.4 14.9Dividend yield, % 7.5 8.3 8.3 8.4 8.8

Source: Barclays Capital

Barclays Capital does and seeks to do business with companies covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

This research report has been prepared in whole or in part by research analysts based outside the USwho are not registered/qualified as research analysts with FINRA.

PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 14.

Stock Rating 2-EQUAL WEIGH

Unchang

Sector View 1-POSITIVUnchang

Price Target GBP 6.1

lowered -6% from GBP 6.

Price (02-Jun-2010) GBP 4.

Potential Upside/Downside +42

Tickers BP/ LN / BP

Market Cap (GBP mn) 807

Shares Outstanding (mn) 18788.

Free Float (%) 97.

52 Wk Avg Daily Volume (mn) 39Dividend Yield (%) 8

Return on Equity TTM (%) 16.

Current BVPS (GBP) 3.

Source: FactSet Fundamentals

Price Performance Exchange-L

52 Week range GBP 6.58-4.

0 1- Ju l 0 1- Oct 0 1- Jan 0 1- Ap r

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Link to Barclays Capital Live for interactive charting

European Integrated Oil

Lucy Haskins

+44 (0)20 3134 6694

[email protected]

Barclays Capital, London

Rahim Karim

+44 (0)20 3134 1853

[email protected]


Lydia Rainforth, CFA

+44 (0)20 3134 6669

[email protected]


Tim Whittaker

+44 (0)20 3134 6696

[email protected]


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Barclays Capital | BP

7 June 2010 2

Balancing returns

On the call the Chairman Carl Henrik Svanberg re-iterated the groups aim to strike the

right balance for shareholders between current returns though the dividend, sustained

investment for long-term growth and maintaining a prudent gearing level. The Chairman

said all issues would be taken into account at the time of setting the 2Q dividend (27th

July)and there is no formal commitment to sustain the dividend. On the call CEO Tony Hayward

mostly passed questions on the dividend to the chairman to answer. In part we believe this

may be to distance himself directly from any future decisions that are made on the payout.

In the immediate aftermath of the spill BP had drawn attention to the financial flexibility

afforded by its balance sheet with a debt/capital target range of 20-30% and 1Q gearing at

only 19%. On the call the company seemed to strike a more cautious note on its gearing

with both the CEO Tony Hayward and CFO Byron Grote signalling that uncertainty about

costs both clean-up and containment as well as eventual fines and liabilities would

increase a preference to keep gearing at the lower end of range. In the table below we have

shown a number of cost and oil price scenarios and the impact on gearing. We have

included the Devon acquisition costs of $7bn in this assessment. CFO Byron Grote said theGulf of Mexico part of the deal had already closed, the Azerbaijan part was expected to

close before the end of 2Q and Brazil in 3Q. Although we continue to forecast the company

will maintain a flat dividend in 2010, there are clear risks to that estimate if the oil price

comes under pressure and if costs continue to rise while the company aims to keep gearing

below the mid-point of its range. We had previously had a rise in the dividend for our 2011

estimates; we now have cut this 5% to remain flat in 2011 and now assume resumption of

growth in 2012.

2010 gearing levels at differing oil prices and cash impacts of spill

40 50 60 70 80 90 100

2 30% 28% 27% 25% 23% 21% 20%

4 31% 29% 28% 26% 24% 22% 21%

6 32% 30% 29% 27% 25% 24% 22%

8 33% 31% 30% 28% 26% 25% 23%

10 34% 32% 30% 29% 27% 26% 24%

12 35% 33% 31% 30% 28% 26% 25%

Oil price, $/bl

Cashimpact,$bn

Source: Company data, Barclays Capital

Light blue shading indicates where the gearing level would reach between 25-30% and dark blue a level above 30%

The payment of the dividend is unlikely to be purely a function of the gearing level in any

one year, with the management and board likely to consider the scale of all future potential

liabilities and payments that the company may face. Given the high level of uncertainty

associated with the size of the eventual cost of third-party litigation, government fines and

penalties the companys caution on gearing on the call clearly was to afford itself with

slightly more headroom. To reflect this, we have shaded in light blue scenarios under which

BPs gearing would be in the 25-30% range, levels we now believe the company may be

nervous of reaching.

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7 June 2010 3

There is also the issue of the political affordability of the dividend with BP facing significant

political pressure from some members of the US government who question the

appropriateness of paying a dividend in the current environment. A major theme on the call

was the necessity for BP to rebuild trust as a long-term member of the business

communities in the US.

Although the company has indicated that it currently does not intend to provision for coststhat are yet unknown, we believe that perhaps one way that BP may be able to address the

political sensitivity around payment of dividends may be to create an oil spill provision fund.

This fund could be used to cover any future costs associated with the spill, in addition to

what could be supported by BPs future operating cash flow. With such a fund in place it

may be seen as less sensitive for BP to elect to continue to pay a dividend to its shareholders

than would otherwise be the case.

Longer term we think the current issue of whether BP can sustain the dividend could be

turned into an opportunity. If there is no lasting impact on BPs operational reputation from

this spill we believe it may not be a bad thing to see some rebasing of the dividend in favour

of investment for the longer term if investors are persuaded that BP will not be restricted

in its access to future attractive reinvestment opportunities.

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7 June 2010 4

Gulf of Mexico valued at 116p

With 11% of the groups production coming from the Gulf, as well as the high margin nature of

these barrels, this basin is of extreme strategic importance for the company. We currently see a

scenario in which the company is forced to exit these assets as highly unlikely, and value these

assets at $34.2bn, pre any spill costs, and $16.8bn on a post cost basis. In total the US upstreamand downstream comprises some 249p of our sum of the parts.

Breakdown of BP price target

$m p/share % of TV

Upstream GoM upstream 34,168 116 19

Cash costs of oil spill -17,415 -59 -10

Net GoM upstream 16,753 57 9

Rest of US upstream 47,836 163 27

US upstream 64,589 220 36

Non-US upstream 145,785 496 81

Total 210,373 715 117

Downstream US 8,618 29 5

Non-US 26,215 89 15

Total 34,832 118 19

Corporate -20,506 -70 -11

Gross Asset Value 224,700 764 125

Net debt -26,288 -89 -15

Minorities -1,000 -3 -1

Long term liabilities -21,590 -73 -12

Net Asset Value 175,822 598 98

Value Creation 3,289 11 2

Total Value 179,111 609 100


Below we present the value of

the Gulf of Mexico assets within

our price target, both pre and

post the cash costs associatedwith the spill. These figures

represent 19% and 9% of our

estimate of total value,

respectively

The US is a quarter of our downstream valuation The US is more than a third of our upstream valuation

US

25%

Non-US

75%

Lower 48

14%

Alaksa

7%

Non-US

64%

Gulf of

Mexico

15%

Source: Company data, Barclays Capital Source: Company data, Barclays Capital

Valuation of upstream excludes the costs associated with oil spill

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7 June 2010 5

BP is clearly trading at a big discount to our estimate of fair value, but we would argue that

the sector as a whole trades at a pronounced discount to our NAV based priced targets. The

table below shows our estimates of both NAV and total value.

The sector trades at 71% of Total Value estimates

Price NAV VC TV P:NAV P:TV

BP 430 598 11 609 72% 71%

Royal Dutch Shell A 1814 2339 44 2383 79% 77%

Royal Dutch Shell B 1744 2339 44 2383 76% 74%

Total 37.9 53.8 1.2 55.0 73% 71%

BG Group 1063 1097 280 1377 98% 78%

Eni 15.2 25.8 0.4 26.3 60% 59%

OMV 25.5 34.7 0.0 34.7 73% 73%

Repsol YPF 16.6 23.1 0.0 23.1 73% 73%

Statoil 132 173 10 183 77% 73%

Source: Company data, Barclays Capital Price as of close of June 3

Our price target of 610p is predicated on a 10% discount rate and an average nominal oil price of

$85/bl. Below we show the implied price target for BP under a range of oil price and discount

rates as well as the associated upsides. Using both the current share price and oil price of

c.$75/bl would imply that investors are assuming close to a 12% discount rate for BP.

Implied price targets (p/share) under a range of scenarios Implied upsides to price target under a range of scenarios

40 50 60 70 80 90 100

8% 391 481 570 659 747 836 924

9% 342 420 499 577 655 733 812

10% 299 368 437 506 575 645 714

11% 267 329 391 453 514 576 638

12% 244 301 357 412 468 524 580

13% 224 275 326 376 427 477 528

14% 205 251 297 343 389 435 480

15% 187 230 271 313 355 396 438

Discountrate

Oil price, $/bl

40 50 60 70 80 90 100

8% -9% 11% 32% 52% 73% 93% 114%

9% -21% -3% 15% 34% 52% 70% 88%

10% -31% -15% 1% 17% 33% 49% 65%

11% -38% -24% -10% 5% 19% 33% 48%

12% -43% -30% -18% -5% 8% 21% 34%

13% -48% -36% -25% -13% -1% 10% 22%

14% -53% -42% -31% -21% -10% 1% 11%

15% -57% -47% -37% -28% -18% -8% 1%

Oil price, $/bl

Discountrate

Source: Company data, Barclays Capital Source: Company data, Barclays Capital Price as of close of June 3

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7 June 2010 6

Clean-up and containment costs estimate rise to $5bn

With its regular spill updates, BP has provided periodic updates on the running total of the

cumulative costs incurred on a gross basis. The last of these updates was on June 1 when

BP had indicated that the total costs had reached $990m. Our estimated breakdown of this

figure based on information provided by the company is shown in the table below, but todate mainly reflect:

The direct clean-up and containment costs incurred by BP as well as the indirect costsincurred by the various Government agencies aiding BP in its efforts.

The costs incurred to date of the two relief wells that are currently being drilled. Grants given to the Gulf States Florida, Alabama, Louisiana and Mississippi. The first

tranche of grants was $100m and a secondary payment of $70m has been given.

The settlement of 15,000 claims for a combined total of $40m.

Estimated breakdown of costs incurred to dateComment

Total cost 990 As of 1/6/2010 press release

Litigation costs, $m 40 Total litigation cost guidance from company

Number of claims paid 15,000 As of 1/6/2010 press release

Implied payout per claim, $ 000 2.7

Grants to Federal States, $m 170 Sum of grants announced on 18/5/2010 and 13/5/2010

Total clean-up and spill containment costs, $m 780 Total costs less litigation costs and grants

Costs for drilling first relief well, $m 125 BP indicated that the first well will cost $100m and 90 days to drill but assumethat there are upfront costs. Assume that ~60% of the costs of both wells hasbeen incurred

Days since accident 41 Accident was reported on 20/4/2010

Daily cost of clean up and containment, $m 10 BP's estimate of daily clean up costs was initially $6m. It was flagged that thiswould increase as activity increased. The last press release when this figure wasreiterated was 4/5/2010. CEO Hayward has recently indicated that the cost isrunning at more than $10m, so we assume an average cost since the incident of$10m per day.

Costs of clean up and containment, $m 410

Estimated non-Federal clean up costs, $m 245

Days since accident 41 Accident was reported on 20/4/2010

Implied cost per day, $m 6


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7 June 2010 7

The run-rate of clean-up and spill containment costs based on the new information we have

is now $19m per day, higher than our previous estimate of $16m. Adjusting our previous

assumptions for this higher run-rate and increasing the length of the clean-up period from

300 to 500 days imply a gross cost estimate of $5.0bn, $2bn above our previous estimate of

$3.0.bn. The table below shows our updated estimate of the total costs, assuming that the

spill is uncontained until the first relief well is completed and that the clean-up of the spill

extends a further 400 days beyond this point.

Updated estimate of containment and clear-up costs

Comment

Costs for drilling relief wells $m 200 BP indicated that a single well will cost $100m, taking 90 days to drill.

Containment and clear-up costs until spill is contained

Number of days 104 Assume that the relief well will take 90 days to complete, in line withguidance plus the 14 day lead time to get the rig in place

Direct costs, $m/day 10 In line with current run rate

Federal costs, $m/day 6 In line with current run rate

Total containment costs, $m 1,661

Clear-up costs post containment

Number of days 396 Total clear-up period of 500 less the 104 days for containment

Direct costs, $m/day 5 Half the current-run rate

Federal costs, $m/day 3 Half the current-run rate

Total containment costs, $m 3,163

Total clean-up and spill containment costs, $m 5,025

BP's pre-tax share, $m 3,266 Assumes 65% share in line with stake in license


Given the high cost of the current sub-sea operations we expect that the daily costs will fall

significantly, and model a 50% reduction following the completion of the relief well. As a

result we believe that BPs ability to completely stem the flow of oil could have a major

impact on the overall costs of the spill, both by reducing the total costs of clean-up and

containment and by reducing the ultimate environmental and economic impact of the spill.

The table below shows the impact that the updated cost estimates have on our 2010 and

2011 estimates. The main impact can be seen in 2011, reflecting our assumption that the

total clean-up of the spill will take longer than previously anticipated. The announcement

that the flow of oil is occurring at a faster rate than previously thought, leads us to expect

that the total time required to clean-up the spill will be significantly longer and now assumea 500 day clean-up versus our previous 300 day estimate.

Estimate of gross cash costs

rise to $5bn

2010 earnings reduced by 1%

and 2011 by 3%

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7 June 2010 8

Higher clean-up costs reduce EPS by a further 3% in 2011

Previous New

2010 2011 2010 2011

Gross cost of relief wells, $m 200 200

Costs of clean up and containment, $m 1,795 225 1,795 1,225Federal clean up costs, $m 718 90 1,073 732

Total non-litigation costs, $m 2,713 315 3,068 1,957

BP share at 65%, $m 1,763 205 1,994 1,272

2010 tax rate, % 34% 34% 34% 34%

Post-tax impact, $m 1,173 136 1,326 846

Change, $m 154 710

Net income estimate, $m 19602 22488 19,448 21,778

% of previous net income estimate -1% -3%


Fines and other costs increases non-clean up cost by $8bn

Trying to assess clean up and containment costs is relatively straightforward relative to the

bigger unknown of third party liabilities. It will be some while before we know where

ultimate responsibility for the leak vests and the scale of the liabilities that BP, its lease

partners and other counterparts in the well might face.

As can be seen from the reconciliation table on page 6, BP has included a charge of $40m of

liabilities already paid. So far 30,000 claims have been filed and 15,000 have been paid. This

implies a payment of only $2,667/claim. The speed with which the claims have been settled

would suggest that these initial claims are low cost. Again the speed (as well as price) of

settlement would suggest that lawyers have not yet become involved. We do not think wecan use the liabilities paid to date as indicative of eventual charges.

It is quite difficult to find precedents for this kind of spill in order to assess potential

liabilities. In BP: Increased clarity over spill costs (May 24), we estimated a potential liability

of $6.5bn net to BP. Although we have no reason to reassess this cost, we now see the risk

for further potential costs arising from fines and criminal investigations that the US

government has indicated it will initiate against the company.

Perhaps the estimate of these to quantity is the fine associated with the Clean Waters Act.

Under this legislation BP could face a fine of $1,000/bl of oil spilt, rising to $3,000/bl

assuming that the company is found to have been negligent. Given the updated guidance of

a flow rate of 12-19k bl/d, we would estimate that the total oil leaked into the Gulf of

Mexico between May 20 and the time that the relief wells are due to be completed could

reach 1.6m bl. This would imply a total fine of almost $5bn on a gross basis and $3.1bn net

to BP given its 65% stake in the field.

In addition to this fine, we assume that the group will face other federal fines and charges

resulting from any potential investigations of a similar magnitude, increasing BPs net cost

by a further $2.6bn. These fines, as well as BPs $500m contribution to deepwater research

of $500m, and further assumed grants to federal states, results in our total estimate of non-

clean-up and containment costs rising from $7bn to over $15bn.

Costs estimate increased to

reflect impact of potential fines

and criminal investigations

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7 June 2010 9

As we have done previously, we have not included any third-party liabilities within our

adjusted earnings or cash flow forecasts, but we are now increasing the liabilities within

our sum of the parts to reflect these costs. This change results in a reduction in our price

target of a further 40p, from 650p to 610p.

Estimate of total costs net to BP

Comment

Gross clean-up and spill containmentcosts, $m

5,025 Pre-tax figure

BP's pre-tax share, $m 3,266 Assumes 65% share in line with stake in license

Tax rate 34% In line with 2010 guidance for corporate rate

BP's post-tax share, $m 2,172

Total Litigation costs, $m 10,000 Barclays Capital estimate

BP's share of litigation costs, $m 6,500 Assumes 65% share in line with stake in license. There is the potential for BP's partnersto seek to use current legislation to cap their exposure to these costs. Should theseattempts be successful this could result in BP's share of these costs rising above the 65%

level given its commitment to meet all legitimate claims

Research fund contribution, $m 500 Assumes that grants are non-tax deductible and BP with bare 100% of costs

Grants to Federal States to date, $m 530 Sum of grants announced on 18/5/2010, 13/5/2010 and 3/6/2010

Further grants to Federal States, $m 1,970 Barclays Capital estimate

Total grants to Federal States, $m 2,500 Assumes that grants are non-tax deductible and BP with bare 100% of costs

Clean water fines

Flow of oil, k bl/d 16 Mid point of the 12-19k bl/d estimate provided by the US government

Total oil leaked, m bl 1.6 Based on assumption that the well will leak for 104 before it is plugged

Fine per barrel spilled, $ 3,000 Figure from the Clean Water Act assuming the case for gross negligenceTotal clean water fine, $m 4,836

BP's share of clean water fine, $m 3,143 Assumes 65% share in line with stake in license.

Other fines and potential charges, $m 4,000 Barclays Capital estimate

BP's share of costs, $m 2,600 Assumes 65% share in line with stake in license.

Total potential cost net to BP, $m 17,415


EPS changes

p/share 2010F 2011F 2012F 2013F 2014F 2015F

New EPS 66.0 74.1 92.6 92.9 92.3 91.4

Old EPS 66.6 76.5 92.7 92.9 92.2 91.2

Change -1% -3% 0% 0% 0% 0%

We have reduced our estimates for 2010 and 2011 to reflect

the higher assumed clean-up and containment costs for the

spill.


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7 June 2010 10

$bn 2005A 2006A 2007A 2008A 2009A 2010F 2011F 2012F 2013F 2014F 2015F

Modelling assumptions:

Oil price, Brent, $/bl 55.0 65.8 72.7 98.1 62.2 80.0 90.0 100.0 100.0 100.0 100.0

US natural gas price, HH $/kcf 8.65 7.23 6.88 8.69 3.96 4.21 4.10 5.25 5.40 5.60 5.75

NW Europe refining margin, $/bl 2.91 1.26 2.63 3.94 1.53 1.11 0.98 1.07 1.47 1.80 2.13

Exchange rate, $: 1.82 1.84 2.00 1.85 1.56 1.55 1.55 1.55 1.55 1.55 1.55

Exploration & Production 27.4 28.5 27.1 39.6 21.5 30.7 34.5 40.2 39.0 37.5 36.0

Refining & Marketing 5.38 5.34 3.93 3.32 3.61 3.34 2.45 2.94 3.13 3.28 3.40

Other & Corporate (0.59) (0.77) (0.95) (0.59) (1.83) (3.26) (2.48) (1.10) (1.10) (1.10) (1.10)

Consolidation Adjustment (0.22) 0.47 (0.72) 0.13 (0.10) (0.10) (0.10) (0.10) (0.10)

RC operating profit 32.5 33.1 29.8 42.8 22.6 30.9 34.4 42.0 40.9 39.6 38.2

Interest (0.76) (0.52) (0.74) (0.96) (1.30) (1.12) (1.10) (0.88) (0.67) (0.53) (0.46)

Pre-tax profit 31.8 32.6 29.1 41.8 21.3 29.8 33.3 41.1 40.3 39.1 37.8

Taxation (9.6) (11.6) (9.8) (15.1) (6.6) (10.0) (11.1) (13.8) (13.5) (13.1) (12.6)

Tax rate, % 30 36 34 36 31 34 34 34 34 34 34

Minorities (0.29) (0.29) (0.32) (0.51) (0.18) (0.30) (0.33) (0.41) (0.40) (0.38) (0.37)

Adjusted Net income 21.9 20.7 18.9 26.2 14.5 19.4 21.8 26.9 26.4 25.6 24.7

% Change 29 (5) (9) 39 (45) 34 12 24 (2) (3) (3)

Special items (1.66) 1.53 (0.57) (0.65) (0.52) (0.05)

% Impact of Special items (8) 7 (3) (2) (4) (0)

Acquisition amortization 0.00

RC profit after exceptionals 20.3 22.2 18.4 25.6 14.0 19.4 21.8 26.9 26.4 25.6 24.7

$bn 2005A 2006A 2007A 2008A 2009A 2010F 2011F 2012F 2013F 2014F 2015F

Adjusted net income, $bn 22.0 20.7 19.0 26.2 14.5 19.4 21.8 26.9 26.4 25.6 24.7

Diluted shares in issue, av, bn 21.4 20.2 19.3 19.0 18.9 19.0 19.0 18.8 18.3 17.9 17.5

Adjusted EPS, p 56.3 55.7 49.1 74.7 48.9 66.0 74.1 92.6 92.9 92.3 91.4

% Change 35 (1) (12) 52 (35) 35 12 25 0 (1) (1)

Adjusted EPS/ADR, $ 6.15 6.16 5.89 8.30 4.59 6.15 6.89 8.62 8.64 8.58 8.50

% Change 34 0 (4) 41 (45) 34 12 25 0 (1) (1)

DPS, p 19.9 21.1 22.7 32.4 35.8 36.1 36.1 37.9 39.8 41.8 43.9

% Change 23 6 8 43 11 1 0 5 5 5 5

DPS, $ 0.36 0.39 0.46 0.56 0.56 0.56 0.56 0.59 0.62 0.65 0.68

% Change 21 10 16 22 1 0 0 5 5 5 5

DPS/ADR, $ 2.14 2.36 2.73 3.33 3.36 3.36 3.36 3.53 3.70 3.89 4.08

Payout ratio, % 35 38 46 40 73 55 49 41 43 45 48

Earnings

Financial Forecasts

EPS calculation

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7 June 2010 11

$bn 2005A 2006A 2007A 2008A 2009A 2010F 2011F 2012F 2013F 2014F 2015F

Adjusted net income 21.9 20.7 18.9 26.2 14.5 19.4 21.8 26.9 26.4 25.6 24.7

Minorities 0.3 0.3 0.3 0.5 0.2 0.3 0.3 0.4 0.4 0.4 0.4

Adjusted depreciation 8.0 9.9 10.5 10.7 12.1 12.6 13.1 13.6 14.2 14.7 15.3

Exploration costs written off 0.3 0.6 0.3 0.4 0.8 0.8 0.9 0.9 1.0 1.1 1.1

Deferred tax (0.3) (1.4) 0.3 1.8 0.7 0.0 0.0 0.0 0.0 0.0 0.0

Post tax int charge on debt 0.3 0.2 0.4 0.4 0.4 0.3 0.3 0.2 0.1 (0.0) (0.1)

EBIDA 31.3 29.7 31.2 40.5 28.3 33.5 36.4 42.1 42.0 41.7 41.4

Less: Post tax interest charge (0.3) (0.2) (0.4) (0.4) (0.4) (0.3) (0.3) (0.2) (0.1) 0.0 0.1

Working capital movement (1.4) 0.1 (2.3) (1.1) 0.3 (0.8) (0.8) (0.8) (0.8) (0.8) (0.8)

Other 1.4 0.5 (0.1) (0.0) 0.2 (0.5) (0.5) (0.5) (0.5) (0.5) (0.5)

Equity income retained (0.7) 0.5 (1.4) (0.1) (0.9) (0.8) (0.8) (0.8) (0.8) (0.8) (0.8)

Cash flow from operations 30.3 30.5 27.1 38.9 27.5 31.1 34.1 39.9 40.0 39.7 39.5

per share, p 79 83 71 112 94 107 117 139 142 145 148

Capex (accounting basis) (13.9) (17.2) (18.8) (20.7) (20.3) (20.0) (20.5) (22.4) (23.4) (24.6) (25.8)

Capex (cash basis) (12.3) (15.1) (17.8) (19.0) (20.7) (19.0) (19.5) (21.4) (22.4) (23.6) (24.8)

Net investment in JVs & assoc (0.8) (0.6) (0.6) (1.1) (0.7) (0.7) (0.7) (0.7) (0.9) (1.0) (1.2)

Dividends paid (8.2) (8.0) (8.9) (10.9) (10.9) (10.8) (10.8) (11.2) (11.5) (11.8) (12.1)

Net free cash flow 9.0 6.8 (0.3) 7.9 (4.8) 0.7 3.1 6.6 5.2 3.4 1.5

Acquisitions (0.1) (0.2) (1.2) (4.1) 0.0 (0.9) 0.0 0.0 0.0 0.0 0.0

Divestments 11.4 6.4 4.5 1.6 3.3 2.0 2.0 2.0 2.0 2.0 2.0

Share issuance (repurchase) (11.3) (15.2) (7.1) (2.6) 0.2 0.0 0.0 (4.0) (4.0) (4.0) (4.0)

Other movements (3.6) (2.4) (1.4) (0.9) 0.2 0.0 0.0 0.0 0.0 0.0 0.0

Surplus/(deficit) 5.5 (4.5) (5.6) 2.0 (1.1) 1.8 5.1 4.6 3.2 1.4 (0.5)

FCF cover of div, x 2.1 1.9 1.0 1.7 0.6 1.1 1.3 1.6 1.5 1.3 1.1

$bn 2005A 2006A 2007A 2008A 2009A 2010F 2011F 2012F 2013F 2014F 2015F


Capital expenditure (10.1) (13.1) (14.2) (15.7) (14.9) (15.3) (16.8) (18.5) (19.4) (20.3) (21.4)

Net cash flow 14.0 12.8 12.1 18.4 11.7 15.6 17.0 19.6 18.4 17.0 15.5


Capital expenditure (2.7) (3.1) (4.4) (4.7) (4.1) (4.0) (3.0) (3.2) (3.3) (3.5) (3.6)

Net cash flow 3.5 2.5 0.7 (0.4) 0.6 0.5 1.0 1.2 1.3 1.3 1.3

Cash flow from operations 0.0 (1.0) (4.3) 0.4 (3.8) (4.3) (3.7) (2.5) (2.4) (2.3) (2.3)

Capital expenditure (0.3) 0.5 0.1 0.4 (2.4) (0.4) (0.4) (0.5) (0.6) (0.8) (0.9)

Net cash flow (0.2) (0.5) (4.1) 0.8 (6.2) (4.7) (4.1) (3.0) (3.0) (3.1) (3.2)

Total net cash flow by sector 17.2 14.8 8.6 18.8 6.1 11.5 13.9 17.8 16.7 15.2 13.6

Dividends paid (8.2) (8.0) (8.9) (10.9) (10.9) (10.8) (10.8) (11.2) (11.5) (11.8) (12.1)

Net cash flow from ops 9.0 6.8 (0.3) 7.9 (4.8) 0.7 3.1 6.6 5.2 3.4 1.5

Sensitivity to oil price, $m 252 252 252 252 252 252 252 252 252 252 252

Implied oil price CF break even, $/bl 39 74 67 81 77 78 74 79 87 94

Cash flow

Other:

Cash flow by sector

Upstream:

Non recurring items

Downstream:

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7 June 2010 12

$bn 2005A 2006A 2007A 2008A 2009A 2010F 2011F 2012F 2013F 2014F 2015F

Ordinary shareholders' funds 80.0 84.6 93.7 91.3 101.6 110.5 121.8 133.8 145.0 155.1 164.1

Minorities 0.79 0.84 0.96 0.81 0.50 0.50 0.50 0.50 0.50 0.50 0.50

Net Debt (cash) 16.2 20.3 26.2 25.0 26.3 24.5 19.5 14.9 11.7 10.3 10.8

Capital employed 97.0 105.8 120.8 117.1 128.4 135.6 141.8 149.2 157.2 165.9 175.4

NBV per share, $ 3.78 4.22 4.89 4.86 5.42 5.89 6.49 7.13 7.73 8.27 8.75

Net debt per share, $ 0.77 1.02 1.37 1.33 1.40 1.31 1.04 0.79 0.62 0.55 0.57

Net debt to equity, % 20.3 24.0 28.0 27.4 25.9 22.2 16.0 11.1 8.1 6.6 6.6

Net debt to capital, % 16.7 19.2 21.7 21.4 20.5 18.1 13.7 10.0 7.4 6.2 6.1

RoAE, % 28.0 25.2 21.2 28.4 15.0 18.3 18.7 21.1 18.9 17.1 15.5

RoACE, % 22.8 21.0 17.3 22.8 12.3 15.2 16.2 18.9 17.5 16.1 14.7

Accumulated depreciation 87.4 98.3 107.1 113.9 126.0 138.6 151.7 165.3 179.5 194.2 209.5

Cash invested 184.3 204.1 228.0 231.0 254.4 274.2 293.5 314.5 336.7 360.1 384.9

CROCI, % 17.0 14.5 13.7 17.5 11.1 12.2 12.4 13.4 12.5 11.6 10.8

$bn 2005A 2006A 2007A 2008A 2009A 2010A 2011F 2012F 2013F 2014F 2015F

Adjusted net income 21.9 20.7 18.9 26.2 14.5 19.4 21.8 26.9 26.4 25.6 24.7

Minorities 0.29 0.29 0.32 0.51 0.18 0.30 0.33 0.41 0.40 0.38 0.37

Pre-tax net interest 0.37 0.39 0.57 0.67 0.63 0.52 0.51 0.28 0.08 (0.07) (0.13)

Tax rate, % 30 36 34 36 31 34 34 34 34 34 34

Post tax interest 0.26 0.25 0.38 0.43 0.43 0.35 0.34 0.19 0.05 (0.04) (0.09)

Post tax operating profit 22.5 21.3 19.6 27.2 15.1 20.1 22.5 27.5 26.8 25.9 25.0

Average capital employed 98.5 101.4 113.3 119.0 122.8 132.0 138.7 145.5 153.2 161.6 170.7

RoACE, % 22.8 21.0 17.3 22.8 12.3 15.2 16.2 18.9 17.5 16.1 14.7

Net debt to EBITDA

Note: Data for 2010-2015 is Barclays Capital forecast.

Return on capital calculation

Balance sheet segments

Capital employed by segment, 2008A

Balance sheet

Balance sheet analysis:

Additional items:

Upstream

62% Other

3%

R&M

35%

0.0

0.5

1.0

05A 07A 09A 11F 13F 15F

x

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7 June 2010 13

Comparative Valuations

Closing Price EV/EBIDA, x P/E, x Dividend yield, %

Company Ratings 02-Jun 2010F 2011F 2012F 2010F 2011F 2012F 2010F 2011F 2012F

Majors

BP 2-Equal Weight 432 4.6 4.0 3.3 6.5 5.8 4.7 8.3 8.4 8.8Chevron* 1-Overweight 74 4.8 4.4 3.6 8.2 7.0 5.3 3.8 4.1 4.3

ExxonMobil* 1-Overweight 62 7.4 6.3 4.7 10.8 8.8 6.1 2.8 3.0 3.1

Royal Dutch Shell A 1-Overweight 1841 5.7 4.8 4.0 9.0 7.0 5.8 5.5 6.0 6.6

Royal Dutch Shell B 1-Overweight 1774 5.6 4.6 3.8 8.7 6.7 5.6 6.1 6.7 7.4

Total 2-Equal Weight 39 5.1 4.6 4.1 8.2 7.4 6.5 6.1 6.4 6.8

Arithmetic Average 5.7 4.9 4.0 8.6 7.1 5.6 5.5 5.8 6.

Euro Integrated Oil 1-Positive

BG Group 2-Equal Weight 1080 8.7 7.8 6.8 13.7 11.7 9.9 1.3 1.4 1.6

Eni 1-Overweight 15.5 4.8 4.2 3.6 8.4 6.9 5.9 6.4 6.6 6.8

OMV 3-Underweight 25.5 5.3 4.6 4.0 8.8 6.7 5.2 3.9 3.9 3.9

Repsol YPF 1-Overweight 16.7 5.3 4.9 4.2 10.0 8.0 6.1 5.1 5.4 6.0Statoil 3-Underweight 134 5.0 4.3 3.6 9.2 7.6 6.1 4.8 5.2 5.6

Arithmetic Average 5.8 5.2 4.4 10.0 8.2 6.6 4.3 4.5 4.8

* Covered by Barclays Capital New York with a 1-Positive sector view; Source: Company data, Barclays Capital

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7 June 2010 14

ANALYST(S) CERTIFICATION(S)

We, Lucy Haskins, Rahim Karim, Lydia Rainforth, CFA, Tim Whittaker and Stephanie Maillet, hereby certify (1) that the views expressed in thisresearch report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2)no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this researchreport.

IMPORTANT DISCLOSURES CONTINUED

For current important disclosures regarding companies that are the subject of this research report, please send a written request to: BarclaysCapital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 1-212-526-1072.

The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's totalrevenues, a portion of which is generated by investment banking activities.

Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA.These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSERule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analysts account.

On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private investmentmanagement businesses. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc.

Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative

analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in othertypes of research products, whether as a result of differing time horizons, methodologies, or otherwise.

Primary Stocks (Ticker, Date, Price)

BP (BP.L, 02-Jun-2010, GBP 4.30), 2-Equal Weight/1-Positive

Materially Mentioned Stocks (Ticker, Date, Price)

BG Group (BG.L, 02-Jun-2010, GBP 10.63), 2-Equal Weight/1-Positive

Chevron Corporation (CVX, 02-Jun-2010, USD 74.13), 1-Overweight/1-Positive

Eni (ENI.MI, 02-Jun-2010, EUR 15.15), 1-Overweight/1-Positive

Exxon Mobil Corp. (XOM, 02-Jun-2010, USD 60.77), 1-Overweight/1-Positive

OMV (OMVV.VI, 02-Jun-2010, EUR 25.45), 3-Underweight/1-Positive

Repsol YPF (REP.MC, 02-Jun-2010, EUR 16.55), 1-Overweight/1-Positive

Royal Dutch Shell A (RDSa.L, 02-Jun-2010, GBP 18.14), 1-Overweight/1-Positive

Royal Dutch Shell B (RDSb.L, 02-Jun-2010, GBP 17.44), 1-Overweight/1-Positive

Statoil ASA (STL.OL, 02-Jun-2010, NOK 132.00), 3-Underweight/1-Positive

Total (TOTF.PA, 02-Jun-2010, EUR 37.87), 2-Equal Weight/1-Positive

Other Material Conflicts

REP.MC: Barclays Bank PLC is associated with specialist firm Barclays Capital Market Makers, which makes a market in Repsol YPF stock. At anygiven time, the associated specialist may have "long" or "short" inventory position in the stock; and the associated specialist may be on theopposite side of orders executed on the Floor of the Exchange in the stock.

XOM: Barclays Capital is acting as financial advisor to XTO Energy Inc. on the potential sale of the company to ExxonMobil Corporation. BarclaysCapital also provided a fairness opinion in connection with this potential transaction. The rating, price target and estimates on XTO Energy havebeen temporarily suspended due to Barclays Capital's role. The rating, price target and estimates on ExxonMobil do not incorporate this potential

transaction.

Guide to the Barclays Capital Fundamental Equity Research Rating System:

Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitionsbelow) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the sectorcoverage universe).

In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investorsshould carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.

Stock Rating

1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month

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7 June 2010 15


investment horizon.

2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-monthinvestment horizon.

RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable orto comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisorycapacity in a merger or strategic transaction involving the company.

Sector View

1-Positive - sector coverage universe fundamentals/valuations are improving.

2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.

3-Negative - sector coverage universe fundamentals/valuations are deteriorating.

Below is the list of companies that constitute the "sector coverage universe":

Americas Integrated Oil

Chevron Corporation (CVX) ConocoPhillips (COP) Exxon Mobil Corp. (XOM)

Hess Corp. (HES) Marathon Oil Corp. (MRO) Murphy Oil (MUR)

Petroleo Brasileiro S.A. (PBR) Petroleo Brasileiro S.A. (PBRA) Suncor Energy (SU)

European Integrated Oil

BG Group (BG.L) BP (BP.L) Eni (ENI.MI)

OMV (OMVV.VI) Repsol YPF (REP.MC) Royal Dutch Shell A (RDSa.L)

Royal Dutch Shell B (RDSb.L) Statoil ASA (STL.OL) Total (TOTF.PA)

Distribution of Ratings:

Barclays Capital Inc. Equity Research has 1472 companies under coverage.

43% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 49% ofcompanies with this rating are investment banking clients of the Firm.

44% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 44% ofcompanies with this rating are investment banking clients of the Firm.

11% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 34% ofcompanies with this rating are investment banking clients of the Firm.

Barclays Capital offices involved in the production of equity research:

London

Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London)

New York

Barclays Capital Inc. (BCI, New York)

Tokyo

Barclays Capital Japan Limited (BCJL, Tokyo)

So Paulo

Banco Barclays S.A. (BBSA, So Paulo)

Hong Kong

Barclays Bank PLC, Hong Kong branch (BB, Hong Kong)

Toronto

Barclays Capital Canada Inc. (BCC, Toronto)

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7 June 2010 16


BP (BP/ LN / BP.L) Stock Rating Sector View

GBP 4.30 (02-Jun-2010) 2-EQUAL WEIGHT 1-POSITIVE

Rating and Price Target Chart - GBP (as of 02-Jun-2010) Currency=GBP

Date Closing Price Rating Price Target

24-May-2010 4.93 6.50

22-Apr-2010 6.36 7.00

14-Dec-2009 5.81 6.85

28-Oct-2009 5.84 2-Equal Weight 6.20

08-Sep-2009 5.43 5.75

21-Jul-2009 5.05 5.90

26-May-2009 5.05 5.80

Clos ing Pr i ce Target Pr i ce Rat i ng Change

Jul- 07 Jan- 08 Jul- 08 Jan- 09 Jul- 09 Jan- 10

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

23-Feb-2009 4.54 3-Underweight 5.90

Link to Barclays Capital Live for interactive charting

Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of BP in the previous 12months.

Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from BP in the past 12 months.

Barclays Bank PLC and/or an affiliate beneficially owns 1% or more of any class of common equity securities of BP.

One of the analysts on the coverage team (or a member of his or her household) owns shares of the common stock of BP.

Barclays Bank PLC and/or an affiliate trades regularly in the shares of BP.

Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from BP within the past 12 months.

BP is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.

BP is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or anaffiliate.

Valuation Methodology: Our price target for BP's shares is derived using a discounted cash flow methodology, using a 10% discount rate. Ourcalculation includes our estimate of value created from future growth based on the company's past and expected future return spread over itscost of capital. The cash flows in our DCF calculation comprise both dollar and local currencies. Our price target is set in local currency, based onthe dollar exchange rate on the date the target is initially published. Subsequently, the corresponding ADR price target in US dollars will move withthe prevailing exchange rate on a daily basis. If the dollar exchange rate relative to the local currency moves significantly compared with the rateused when the local currency price target was initially published, we re-calculate and re-publish the local currency price targets using the currentdollar exchange rates. Our price targets are not market linked.

Risks which May Impede the Achievement of the Price Target: Our BP share price target and recommendation depends upon our estimates of

profitability and cash flow and the rate at which we discount the cash flows. These estimates in turn are based on assumptions for oil prices anddownstream margins. These assumptions depend on the Barclays Capital European Oil and Gas equity research teams estimates for future energysupply-demand patterns, exchange rates, commodity prices. All of our estimates are subject to revision and may be materially different fromeventual outcomes. In addition the company operates on a global basis in many regions with sometimes unstable political regimes and changingfiscal terms. The actions of OPEC can also have a significant influence on the oil market. All estimates assume no marked changes in the currentpolitical landscape. Both upstream and downstream operations are subject to planned and unplanned downtime. BP has a greater than averageexposure to Russia where it has close to 25% of its production base.

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This publication has been prepared by Barclays Capital; the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. Thipublication is provided to you for information purposes only. Prices shown in this publication are indicative and Barclays Capital is not offering to buy or sell or solicitingoffers to buy or sell any financial instrument. Other than disclosures relating to Barclays Capital, the information contained in this publication has been obtained fromsources that Barclays Capital believes to be reliable, but Barclays Capital does not represent or warrant that it is accurate or complete. The views in this publication arthose of Barclays Capital and are subject to change, and Barclays Capital has no obligation to update its opinions or the information in this publication. Barclays Capitaand its affiliates and their respective officers, directors, partners and employees, including persons involved in the preparation or issuance of this document, may fromtime to time act as manager, co-manager or underwriter of a public offering or otherwise, in the capacity of principal or agent, deal in, hold or act as market-makers oadvisors, brokers or commercial and/or investment bankers in relation to the securities or related derivatives which are the subject of this publication.

The analyst recommendations in this report reflect solely and exclusively those of the author(s), and such opinions were prepared independently of any other interestsincluding those of Barclays Capital and/or its affiliates.

Neither Barclays Capital, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct oconsequential loss arising from any use of this publication or its contents. The securities discussed in this publication may not be suitable for all investors. BarclaysCapital recommends that investors independently evaluate each issuer, security or instrument discussed in this publication and consult any independent advisors theybelieve necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changesin market liquidity). The information in this publication is not intended to predict actual results, which may differ substantially from those reflected. Past performance isnot necessarily indicative of future results.

This communication is being made available in the UK and Europe to persons who are investment professionals as that term is defined in Article 19 of the FinanciaServices and Markets Act 2000 (Financial Promotion Order) 2005. It is directed at, and therefore should only be relied upon by, persons who have professionaexperience in matters relating to investments. The investments to which it relates are available only to such persons and will be entered into only with such personsBarclays Capital is authorized and regulated by the Financial Services Authority (FSA) and member of the London Stock Exchange.

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Copyright Barclays Bank PLC (2010). All rights reserved. No part of this publication may be reproduced in any manner without the prior written permission of BarclayCapital or any of its affiliates. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Additional informationregarding this publication will be furnished upon request.

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European Integrated Oil (Cont'd)

Stephanie Maillet

+44 (0)20 3134 2824

[email protected]


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