14 June 2008

BP: Look Ahead to June 2008 Results

The GCFR Overall Gauge score of BP shot up to 47 points after we analyzed this oil giant's first-quarter financial statements. This score was a mere 17, out of 100 possible, points the previous quarter. High energy prices led to impressive Revenue growth, in spite of flat production levels and compressed refining margins. (While the positive effects of high oil prices on energy companies are well known, the negative effects can be seen in the decision by Exxon Mobil (XOM) to exit the retail market.) Nevertheless, enough of the powerful Revenue surge reached the bottom line to yield strong Net Income growth.

BP p.l.c. (BP), the former British Petroleum, is the Oil and Gas Refiner and Marketer with, by far, the most sales and the largest market capitalization. BP became a behemoth, in part, by acquiring Amoco and Arco. As a result of these purchases and other investments, BP became the operator of 13 oil fields and four pipelines on Alaska's North Slope.

The last few years have been, to say the least, trying ones for BP. The company has faced tragedies, maintenance problems, market manipulation allegations, and (now, especially) disputes with its Russian partners. BP may have been distracted for a time by a leadership change expedited by ignominious events.

On 29 July 2008, BP will announce its second quarter results. In anticipation of this report, we've modeled BP's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the company's historical financial results and guidance provided by company management.

BP management explained its strategy to the financial community in February 2008.

Quarterly Revenue (i.e., Sales and Other Operating Revenues) stalled for a couple of years, but it resumed an upward trend in 2007's fourth quarter. Revenue in the March 2008 quarter was 43 percent higher than in the first quarter of 2007. While surging oil prices suggests continued growth at a zippy pace, we're going to be a little more modest in our expectations. Revenue of $91 billion in the quarter might only be 3.7 percent above first-quarter sales, but this figure is nearly 27 percent more than Revenue in the second quarter of 2007.

The Gross Margin has been between 17 and 20 percent recently. We expect BP to achieve a 19 percent margin in the second 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 $91 billion Revenue estimate, CGS should be about $73.7 billion.

Depreciation expenses have been between 3 and 4 percent of Revenue. With sales surging, we should see a ratio in the second quarter towards the lower end of this range. If we assume 3.2 percent, these expenses (including Depletion and Amortization) could total $2.9 billion.

Exploration costs have been between $200 and $300 million per quarter recently. We've selected $300 million as the target of the second quarter.

Sales, General, and Administrative (SG&A) expenses, what BP calls Distribution and Administration Expenses, have averaged a little more than 5 percent of Revenue recently. This ratio has been between 4.5 and 7.0 percent. We expect it to be 4.75 percent of Revenue in the second quarter, which leads to our SG&A estimate of $4.3 billion.

BP typically reports other special operating charges, such as asset impairments. These charges can be minor or massive, with an average value over the last 10 quarters of $380 million. We will assume a $400 million charge in the second quarter.

Rolling up all the estimates above would result in Operating Income, as we define it, of $9.4 billion. This figure is 11.9 percent greater than Operating Income in the second quarter of 2007.

BP also reports substantial income (or, occasionally, losses) from investments and asset sales. Interest income tends to be less significant. We've used historical averages to set targets for the various types of income, which we classify as non-operating. The total is $1.8 billion, which brings our estimate for pre-tax income to $11.1 billion.

If the income tax rate is 34 percent, Net Income will be about $7.3 billion ($2.33/ADR). This is about the same as the June 2007 quarter, which benefited from an extra-large $1.3 billion in gains on asset sales.

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.


June 2008
June 2007
Revenue (1)

Op expenses

CGS (2) (73,710)

Depreciation (3)


SG&A (4)

Other (5) (400)
Operating Income
9,355 8,359
Other income

Investments (6)

Asset sales (7)

Interest, etc. (8)
240 (27)
Pretax income

11,113 10,724
Income tax

Net Income
7,334 7,441

Shares outstanding

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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