16 April 2008

BP: Look Ahead to 2008 First Quarter Results

When we analyzed BP after the results from 2007's fourth quarter became available, the Overall gauge score was a dismal 17 out of 100 possible points. The Growth, Profitability, and Value gauges all registered scores below 5 of 25 possible points. Revenue Growth, at only 6.9 percent, seemed surprisingly low given the high energy prices with which we are all familiar. However, there were also possible signs of a turnaround in the fourth-quarter results. Revenue and production were up, and Net income perked up significantly in the quarter. Alas, it was still down on a year-over-year basis.

BP p.l.c (BP), the former British Petroleum, is the Integrated Oil and Gas company with the third-most sales and the fourth largest market capitalization in the world. BP became a behemoth, in part, by acquiring Amoco and Arco.

We've now made an estimate of BP's results in the recently concluded first quarter of 2008. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data, which the company will announce on 29 April 2008. The foundation for our estimates are the company's historical results. We would have adjusted the estimates to reflect company earnings guidance, if it had been in a form more suitable to our purpose.

Quarterly Revenue (i.e., Sales and Other Operating Revenues) stalled for a couple of years, but it has resumed an upward trend. Revenue jumped dramatically in the fourth quarter of 2007: It was almost 12 percent greater than in the third quarter and 29 percent greater than in the fourth quarter of 2006. While surging oil prices and improving production at BP offer reasons for optimism, we're going to be a little more modest in our expectations for the first quarter of 2008. Revenue of $80 billion in the quarter would be a tiny sequential increase, but still represent a year-over-year increase of 15 percent.

The Gross Margin has been in a range between 17 and 20 percent recently. We expect it will be about 19 percent in the first quarter. In other words, we expect the Cost of Goods Sold (CGS) -- which we define to be Purchases, plus Production and Manufacturing Expenses, plus Production and Similar Taxes -- to be 81 percent of Revenue. Given our $80 billion Revenue estimate, CGS should be about $64.8 billion.

Depreciation expenses have rather consistently been about 4 percent of Revenue. In the first quarter, these expenses (including Depletion and Amortization) could total $3.2 billion.

Exploration costs are also variable, but the quarterly figures aren't especially material. We've somewhat arbitrarily selected $240 million as the target of the first quarter.

Sales, General, and Administrative (SG&A) expenses, what BP calls Distribution and Administration Expenses, are normally around 5.5 percent of Revenue. Therefore, we expect SG&A to equal $4.4 billion.

BP typically reports other special operating charges, such as asset impairments, each quarter. The amounts of these charges can be minor or more than $1 billion, but the greatest amounts usually get recorded in the fourth quarter. Since we're currently concerned with the first quarter of a new year, we will set the expectation at a more moderate $250 million.

Rolling up all of the estimates above would result in Operating Income of $7.1 billion, which would be 19.5 percent greater than in first quarter of 2007.

BP also reports substantial income from gains on investments, gains on asset sales, and other sources. We treat this income as non-operating. We've set targets for the various types of non-operating income that are near historical averages. The total is $1.5 billion, which brings our estimate for pre-tax income to $8.6 billion.

If the income tax rate is 34 percent, Net Income will be about $5.7 billion ($1.80/ADR). This would be a 20 percent increase over the comparable quarter in the previous year.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.


March 2008
March 2007
Revenue (1)

Op expenses

CGS (2) (64800)

Depreciation (3)


SG&A (4) (4400)

Other (5) (250)
Operating Income
7110 5949
Other income

Investments (6)

Asset sales (7)

Interest, etc. (8)
0 62
Pretax income

8610 7187
Income tax

Net Income
5683 4747


1. Sales and other operating revenues
2. Purchases + Production and manufacturing expenses + Production and similar taxes
3. Depreciation, depletion and amortization
4. Distribution and administration expenses
5. Impairment and losses on sale of businesses and fixed assets + Fair value (gain) loss on embedded derivatives
6. Earnings from jointly controlled entities + Earnings from associates
7. Gain on sale of businesses and fixed assets
8. Interest and other revenues - Finance costs + Other finance income

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