01 December 2008

BP: Look Ahead to December 2008 Quarterly Results

The GCFR Overall Gauge of BP soared in the third quarter from 51 to 78 of the 100 possible points.  Our analysis report explained this result in some detail.

High energy prices earlier in this year pushed the Growth gauge to the 25-point maximum score, while the 28-percent dive in the ADR price during the third quarter enabled the contrary Value gauge to achieve the same perfect score.

Third-quarter Revenue was 44.6 percent greater than in the September 2007 quarter.  Operating costs were substantially higher than we expected, but the third quarter benefited greatly from a $1 billion "fair value gain on embedded derivatives."

To look ahead, we've modeled BP's Income Statement for the December 2008 quarter.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data that the company will announce on, or about, 3 February 2009.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

BP p.l.c. (NYSE: BP) is the Major Integrated Oil & Gas firm with the third-most sales and fifth-highest market value.  It competes with firms such as Exxon Mobil (NYSE: XOM) and Chevron Corp. (NYSE: CVX).  BP became a behemoth, in part, by acquiring Amoco and Arco.  As a result of these purchases and other investments, BP now operates of 13 oil fields and four pipelines on Alaska's North Slope.

In September, BP spent $1.9 billion to purchase 25 percent of Chesapeake Energy's (NYSE: CHK) properties in the Fayetteville Shale natural gas field in Arkansas.  BP previously purchased gas-producing shale assets in Oklahoma from Chesapeake for $1.75 billion.  There have been rumors that BP might buy all of Chesapeake.

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.   Reduced production and lower refining margins haven't helped.

It appears that BP has resolved an acrimonious dispute with its Russian partners about the management of the TNK-BP joint venture.

BP management discloses a lot of data about trading conditions, but it does not issue quarterly guidance that is easily translatable into Income Statement figures.  Revenue is dependent on how much oil and gas the company produces and refines and the prices at which it can sell this output.   Geopolitical and natural forces (e.g., weather) can have a significant effect on productivity and prices.

In our earnings projection for ConocoPhillips, we used the price of a barrel of Light Sweet Crude oil to come up with a rough estimate the decline in Revenue from the third quarter to the fourth.  This crude approach indicated that fourth-quarter Revenue could be 35 to 40 percent lower than Revenue in the third quarter of this year, assuming that production is relatively constant.

Since BP's Revenue was $103.2 billion in the September quarter, we might see Revenue near $65 billion in the fourth quarter.  Given that production in the third quarter was temporarily disrupted by events in the Caucasus and Gulf of Mexico, BP's output should improve marginally in the fourth quarter.  To account for the increase, we will round up our Revenue target to $70 billion.

The Gross Margin has been between 16 and 20 percent recently.  We expect BP to achieve an 18 percent margin in the fourth 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 82 percent of Revenue.  If our $70 billion Revenue estimate is true, CGS should be about $57.4 billion.

Depreciation expenses have been about 3 percent of Revenue.  With lower Revenue, the ratio in the fourth quarter should increase.  If we assume 3.5 percent, these expenses (including Depletion and Amortization) could total $2.5. billion.

Exploration costs are normally between $150 and $300 million per quarter, but can be more or less on occasion.  We've selected $200 million as the target for the fourth quarter.

Sales, General, and Administrative (SG&A) expenses, what BP calls Distribution and Administration Expenses, have averaged 4.2 percent in the last four quarters.  We expect it to be 4.5 percent of Revenue in the fourth quarter, which leads to our SG&A estimate of $3.2 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 eight quarters (ignoring the highest and lowest values) of $360 million.

Rolling up all the estimates above would result in Operating Income, as we define it, of $6.4 billion.  This figure is 13.6 percent more than Operating Income in the fourth 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 forpre-tax income to $7.9 billion.

If the income tax rate is 35 percent, Net Income will be about $5.15 billion ($1.66/ADR).  With respect to the year-earlier figures, the absolute and per-share growth rates would be 14.3 and 16.9 percent.

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.

($M) December 2008
December 2007
Revenue (1) 70,000 79,852
Op expenses
CGS (2) (57,400) (65,421)
Depreciation (3) (2,450) (3,020)
Exploration (200) (201)
SG&A (4) (3,150) (4,212)
Other (5) (363) (1,331)
Operating Income 6,437 5,667
Other income
Investments (6) 1,060 1,149
Asset sales (7) 433 270
Interest, etc. (8) (10) (21)
Pretax income 7,920 7,065
Income tax (2,772)
Net Income 5,148 4,504
$1.66/ADS $1.42/ADS
Shares outstanding 3,100 3,163
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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