14 September 2008

BP: Look Ahead to September 2008 Quarterly Results

The GCFR Overall Gauge assessment of BP rose in the first quarter of 2008 from the depths.  It then edged up to 52, of the 100 possible, points when we analyzed the company's second-quarter financial statements

We're now getting ready for the results from the nearly complete third quarter.

The Growth gauge was the star in the June quarter, attaining 24 of 25 possible points.  Revenue, Net Income, and Cash Flow from Operations all increased at accelerating rates.  Second-quarter Revenue, for example, surpassed that of the year-earlier quarter by 51 percent. 

However, this performance was almost entirely due to high energy prices.  Production levels were, as BP expressed it, "broadly flat," and refining margins were slim.  It should, therefore, be no surprise that BP's share price has dropped along with the price of crude oil since July.  (We've linked to a chart on the thisismoney.co.uk web site that shows the price of Brent crude oil and BP's London-listed shares.)

BP ADRs have lost more than 20 percent of their value so far in the third quarter.  The high price for the year was set in late May, more than a month before oil itself.

BP p.l.c. (BP), the former British Petroleum, is the Major Integrated Oil & Gas firm with the third-most sales and fifth-highest Market Value.  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 an ignominious leadership change.   BP recently took steps to resolve an acrimonious dispute with its Russian partners about the managment of the TNK-BP joint venture.

On 28 October 2008, BP will announce its third 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.

We have less confidence in our projections of BP's performance than we have in some of our other models.  BP's results are volatile from quarter to quarter and management guidance isn't very specific.

Quarterly Revenue (i.e., Sales and Other Operating Revenues) has increased nicely in each of the the last three quarters.  Given the drop in oil prices, production challenges in the Caucasus, and stormy weather in the Gulf of Mexico, we assume the upward trend in Revenue will be broken.  Our target is $98 billion, which is about midway between the Revenue figures for the first and second quarters of the year.  This amount is 37 percent above Revenue in the September 2007 quarter.

The Gross Margin has been between 17 and 20 percent recently.  We expect BP to achieve a 19.5 percent margin in the third 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 80.5 percent of Revenue.  If our $98 billion Revenue estimate is true, CGS should be about $78.9 billion.

Depreciation expenses have been 3 to 4 percent of Revenue.  With sales now high, the ratio in the third quarter should be in the lower end of this range.  If we assume 3.2 percent, these expenses (including Depletion and Amortization) could total $3.1 billion.

Exploration costs have been between $120 and $300 million per quarter.  We've selected $180 million as the target for the third quarter.

Sales, General, and Administrative (SG&A) expenses, what BP calls Distribution and Administration Expenses, have averaged 4.5 percent in the last four quarters.  We expect it to be 4.0 percent of Revenue in the second quarter, which leads to our SG&A estimate of $3.9 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 $450 million.  We will assume a $500 million charge in the third quarter.

Rolling up all the estimates above would result in Operating Income, as we define it, of $11.4 billion.  This figure is more than double Operating Income in the third 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 $1.5 billion, which brings our estimate for pre-tax income to $12.9 billion.

If the income tax rate is 35 percent, Net Income will be about $8.4 billion ($2.66/ADR). 
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.


September 2008
September 2007
Revenue (1)

Op expenses

CGS (2) (78,890)

Depreciation (3)


SG&A (4)

Other (5) (500)
Operating Income
11,374 5,305
Other income

Investments (6)

Asset sales (7)

Interest, etc. (8)
0 (1)
Pretax income

12,874 6,636
Income tax

Net Income
8,368 4,478

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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