14 June 2009

BP: Look Ahead to June 2009 Quarterly Results

The GCFR Overall Gauge of BP (NYSE: BP) dropped from 64 points, of the 100 possible, to 50 points in the first quarter of 2009.  (Note that the latest score is three points less than originally reported because we adjusted our scoring algorithm.)  Our analysis report explained in some detail how this score was attained.

Earnings in the March quarter fell from $2.25 to $0.81 per ADRRevenue fell 46 percent because much lower energy prices outweighed a small production increase.  However, production-related costs fell by 53 percent, so the Gross Margin actually improved.

We have now modeled BP's Income Statement for the June 2009 quarter.  The intent of this exercise was to produce a baseline for identifying deviations, positive or negative, in the actual data that the company is scheduled to announce on 28 July 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. (NYSE: BP) is the third-largest Major Integrated Oil & Gas company when assessed by Revenue, and it ranks fourth by Market Capitalization.  Other majors include Exxon Mobil (NYSE: XOM), Chevron Corp. (NYSE: CVX), and ConocoPhillips (NYSE: COP).

The former British Petroleum became a behemoth by acquiring both Amoco and Arco.  These transactions also made BP a significant operator of Alaskan oil fields and pipelines.  More recently, 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.

BP recently issued a data-heavy annual statistical review of the world energy market.  The company highlighted the following points:

  • Global oil consumption declined by 0.6% in 2008
  • World natural gas consumption grew by 2.5%
  • [Coal was] the fastest growing fuel in the world for the sixth consecutive year
  • World primary energy consumption grew by 1.4% in 2008

FT.com's Alphaville pointed out that:

BP actually sees curtailing production in the future is a lack of global demand, not oil resources.

Energy prices (and, therefore, the revenues of energy producers) surged through the first half of 2008.  The price of crude oil exceeded $140 per barrel at its peak.  The global economy then stalled, and speculators exited the market.  Crude oil plunged below $40 by the end of 2008.  However, the price has spiked again this spring to about $70 per barrel.  The recent rise has been linked to fears of a weaker dollar and inflation.  (Others are skeptical the increase is justified.)

Natural gas prices also soared and crashed last year, but they haven't had much of a rebound.

The energy price roller coaster has not been the only challenge BP has faced in the last few years.  The company has suffered through tragedies, maintenance problems, market manipulation allegations, and an ignominious leadership change.  The U.S. recently sued BP for Clean Water Act violations results from two oil spills in 2006 into Prudhoe Bay.

A more recent 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 were lost.

BP and its Russian partners in TNK-BP agreed, after much wrangling, to settle their dispute over control of the joint venture.  However, the two sides, which each own 50 percent of TNK-BP, still haven't agreed on a permanent CEO.

We're now ready to look ahead.

BP makes scads of operating information available to investors, but it does not (as far as we know) issue quarterly guidance that directly translates into Income Statement figures.  So, we have to consider the fundamentals of energy market. 

The company's Revenue is dependent, for the most part, on how much oil and natural gas it produces and refines, the cost of production, and the prices at which various energy products are bought and sold.  It is sometimes also necessary to assess geopolitical and natural forces (e.g., weather) that can significantly affect productivity and prices.  For numerical data, the extensive trading conditions figures the company makes publicly available is especially helpful.  From this source, we learn:
  • The average price per barrel of Brent crude oil has rebounded from $44.46 in the first quarter of this year to about $55 in the current quarter. 
  • The benchmark price of Russian oil jumped even higher, from $19.52 to $30.13.
  • U.S. natural gas prices have continued their long decline, from $4.91/mmbtu to $3.51.
  • BP's Refining Global Indicator Margin has also declined, from 6.2 to 5.3.

Given these figures, we expect BP's Revenue in the second quarter to rise, but only modestly, above the first quarter's $47.3 billion.  Our working estimate is the nice round number of $50 billion, which is 54 percent less than Revenue in the June 2008 quarter.

BP's Gross Margin was 21 percent last quarter, which was more profitable than the normal 16-to-20 percent range.  We will set a 20-percent target for the margin in the second quarter.  In other words, we expect the Cost of Goods Sold (CGS) -- which we define for BP to be Purchases, plus Production and Manufacturing Expenses, plus Production and Similar Taxes -- to be 80 percent of Revenue.  Combining this ratio with our $50 billion Revenue estimate yields a CGS prediction of $40 billion.

Depreciation (including Depletion and Amortization) expenses have averaged about $2.75 billion per quarter.  We assume a similar expense, which would be 5.5 percent of Revenue, in the second quarter.

Exploration costs are normally between $150 and $300 million per quarter, but were even less in the first quarter.  We've selected $175 million as the target for the second quarter.

Sales, General, and Administrative (SG&A) expenses, what BP calls Distribution and Administration Expenses, were below $3.5 billion in the first quarter for the first time in several years.  We assume a similar expense (7.0 percent of Revenue) in the second quarter.

If there are no other special operating gains or losses, such as asset impairments, Operating Income, as we define it, would be about $3.6 billion.  This figure is 71 percent less than Operating Income in the first quarter of 2008.

BP also reports non-operating income and expense.  We won't make any assumptions about asset sales, but $200 million seems like a reasonable, if not conservative, net target for other expenses.  This would bring our estimate for pre-tax income close to $3.4 billion.

If the income tax rate is 40 percent, and if after-tax earnings from jointly controlled entities and associates total $500 million (a shaky estimate), Net Income will be about $2.5 billion ($0.80/ADR).  This is 73 percent below last year's figure.

Please click here to see a full-sized, normalized depiction of the projected results next to BP's quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Note: The ultra-long-term chart of the price of oil was part of BP's statistical review, but brought to our attention by FT Alphaville.  The source for the historical charts of crude oil and natural gas futures is Tradingcharts.com.

Full disclosure:  Long BP at time of writing

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