02 April 2009

BP: Look Ahead to March 2009 Quarterly Results

The GCFR Overall Gauge of BP (NYSE: BP) slipped from 77 to 65 points of the 100 possible points in the fourth quarter of 2008.  Our analysis report explained in some detail how this score was attained.  (Recent tweaks to our gauges bumped up BP's current score by one point to 66.)

We have now modeled BP's Income Statement for the March 2009 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 is scheduled to announce on 28 April 2009.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

First, we present some background information.

BP p.l.c. is the Major Integrated Oil & Gas firm with the third-most sales and fifth-highest market value.  Other majors include Exxon Mobil (NYSE: XOM), Chevron Corp. (NYSE: CVX), and ConocoPhillips (NYSE: COP).

BP became a behemoth by acquiring both Amoco and Arco.   These transactions also made BP a significant operator of Alaskan oil fields and pipelines.  The growth-through-acquisition strategy has continued, albeit on a smaller scale.  For example, in separate transactions totaling $3.65 billion, BP paid Chesapeake Energy (NYSE: CHK) for a stake in Arkansas's Fayetteville Shale field and an interest in Oklahoma's gas-producing shale properties.

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.  Some problems remain unsettled: the U.S. recently sued BP for two oil spills in 2006 into Prudhoe Bay.  In this case, BP is accused of failing to take spill-prevention measures mandated by the Clean Water Act.

Another tragedy occurred in April 2009 when a helicopter operated on behalf of BP crashed while returning to Scotland from an offshore oil field.  Sixteen lives are feared lost.

BP and its Russian partners in the TNK-BP joint venture agreed, after much wrangling, last year to settle their dispute by appointing a new board and new BP-nominated, Russian-approved CEO.  However, TNK-BP is still operating without a new CEO.  One candidate appeared to be on track, but his appointment was halted.  The Russian partners might not be in a big rush for a new CEO to be seated.

The fall in energy prices and lower refining margins in late 2008 hurt BP more than we anticipated.  Revenue in the fourth quarter of 2008 was 40 percent less than in the third  quarter and 23 percent less than in the fourth quarter of 2007.  Production in the December 2008 quarter was a mere 1 percent higher than in December 2007 period. 

In early March, BP announced that oil and gas production will grow more slowly than previously forecast.

The fourth quarter included $1.62 billion in charges for "Impairment and losses on sale of businesses and fixed assets."  In addition, TNK-BP was responsible for a $682 million loss during the quarter.  BP stated that this loss "reflected the impact of the calculation lag on Russian export duties in the falling price environment and several asset impairments."  And, BP wrote-down its investment in Rosneft (MCX: ROSN) by $517 million, to reflect market value.

These results cut the Growth gauge by 6 points and the Value gauge by 3 points.

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 natural 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.

The oil prices tracked by BP are down about 22 percent from the fourth quarter of 2008 to the first quarter of 2009.  Natural gas prices are down 17 percent in Europe and almost 30 percent in the U.S.  On the other hand, BP's Refining Global Indicator Margin is up about 21 percent, with margins higher in the U.S.

Given these figures, we could see Revenue in the first quarter fall to $45 billion.  This amount is just over half the Revenue in the March 2008 quarter.

With the exception of an anomalous figure last quarter, BP has been attaining a Gross Margin between 16 and 20 percent in recent years.  We will, therefore, set an 18 percent margin as the target for 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 82 percent of Revenue.  If our $45 billion Revenue estimate is true, CGS would be about $36.9 billion.

Depreciation expenses have around $2.7 billion per quarter.  Given that we expect much lower Revenue in the quarter, Depreciation expenses (including Depletion and Amortization) will soar to 6 percent of Revenue.

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 been in the area between $3.6 billion and $4.0 billion in most recent quarters.  We assume the company might get this cost down to $3.5 billion (7.8 percent of Revenue).

If there are no other special operating gains or losses, such as asset impairments, Operating Income, as we define it, would be about $1.7 billion.  This figure is 83 percent less than Operating Income in the first quarter of 2008.

BP also reports income and losses from asset sales and interest income.  We've used historical averages to set targets for the various types of income, which we classify as non-operating.  The total is $250 million, which brings our estimate for pre-tax income close to $2.0 billion.

If the income tax rate is 40 percent, and if after-tax earnings from jointly controlled entities and associates total $500 million, Net Income will be about $1.7 billion ($0.53/ADR).  This is 77.5 percent below last year's figure.

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.


1 comment:

  1. My opinion is that of the big oil companies, people always seem to forget about BP.

    The focus is always on exxon, conoco or Chevron. I agree that BP seems to be cheap.