29 July 2009

BP: Income Statement Analysis for the June 2009 Quarter

BP (NYSE: BP) earned a profit of $1.39/ADR in the three months that ended 30 June 2009, down from $2.98 in last year's second quarter.

This post examines the Income Statement for the quarter and compares its entries to our "look-ahead" estimates.  Our target for Net Income in the second quarter was $0.80.  We were not alone in underestimating BP's second quarter earnings by a wide margin.

In a second article, we will report BP's scores as measured by the GCFR Financial Gauges. The follow-up post will also provide the latest figures for the financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the 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.

BP prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), as adopted for use by the European Union.  Reports prior to 2006 complied with UK Generally Accepted Accounting Principles

Second-quarter Revenue (i.e., Sales and Other Operating Revenues) was 15.8 percent more than in the March 2009 quarter, but Revenue was 49.6 percent less than in last year's second quarter.  Revenue exceeded our estimate by 9.6 percent.
Reported production in the quarter, on a barrel-of-oil equivalent basis, was 4 percent higher than in the second quarter of 2008. BP attributed the increase to "the continued ramp-up of production from major projects that started up in 2008 and the first half of 2009."

Revenue from the Refining and Marketing business was up almost $9 billion from last quarter, but it was still only half of last year's figure when oil prices were peaking.

"overall refining availability rose 5.3 percentage points versus the same period last year, to 93.6 per cent, its highest level since the first quarter of 2005."

BP's Cost of Goods Sold (CGS) -- which we define to be Purchases, Production and Manufacturing Expenses, and Production and Similar Taxes -- was 77.9 percent of Revenue.  This equates to a Gross Margin of 22.1 percent, which is significantly more profitable than our 20.0 percent prediction.  The Gross Margin in the year-earlier quarter was 19.8 percent.

Depreciation (including Depletion and Amortization) was 12.4 percent more than our $2.75 billion estimate. 

Exploration costs in the second quarter were almost double our $175 million estimate.  The exploration expense was the highest it has been in a quarter since 2006.  Of the total expense, two-thirds was related to the company's U.S. operations

Sales, General, and Administrative (SG&A) expenses, which BP calls Distribution and Administration Expenses.  These expenses were 6 percent below our $3.5 billion prediction.

Other Operating income and expenses is our catchall category.  Items of this sort are erratic and, as far as we can tell, unpredictable from quarter to quarter.  In the second quarter, the Other category consisted of a $154 million "Fair value gain ...  on embedded derivatives."

Operating Income, as we define it, was $5.5 billion, 56 percent less than last year's $12.5 billion gain.  However, Operating Income was nearly 55 percent more than our prediction.  Much better-than-expected Revenue and Gross Margin were the main reasons the actual results exceeded our prediction.

The quarterly results benefited from a $522 million gain on the sale of a business, less impairment charges of $154 million.  Net interest expense greater than last year, but quite a bit less than we anticipated.

The income tax rate was 41.1 percent. Our estimate was 40 percent. 

After-tax earnings from jointly controlled entities and associates added $1 billion.  We expected $500 million.

The bottom-line result was Net Income of $4.385 billion ($1.39/ADR), which was 53 percent less than earnings in the year-earlier quarter.  Our estimate was much too pessimistic.

Although Revenue, Operating Income, and Net Income dropped significantly, they all did much better than we had thought likely.  Production was up, and the Gross Margin was the highest it has been since 2005. 

Full disclosure:  Long BP at time of writing

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