13 September 2009

BP: Look Ahead to September 2009 Quarterly Results

The GCFR Overall Gauge of BP (NYSE: BP) dropped from 51 of the 100 possible points to 31 in the second quarter of 2009.   Our income statement and financial gauge analyses explained in some detail how the score was attained.

BP's operations improved in the second quarter.  Reported production, on a barrel-of-oil equivalent basis, was 4 percent higher than in the same period last year.  In addition, the Gross Margin (as we define it) was the highest it had been since 2005.

However, these improvements were overshadowed by lower energy prices.  Revenue fell by 50 percent, which was actually better than we expected.  Earnings, despite a large gain on the sale of a business, fell from $2.98 per ADR to $1.39. 

We have now modeled BP's Income Statement for the September 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 27 October 2009.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

First, we set the stage with some background information about the company and the business environment in which it operates.

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), Royal Dutch Shell (NYSE: RDS.A), 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.  In separate deals in 2008 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.

Earlier this month, BP announced a "giant" oil discovery in the Gulf of Mexico.

BP announced today [2 September 2009] a giant oil discovery at its Tiber Prospect in the deepwater Gulf of Mexico. The well, located in Keathley Canyon block 102, approximately 250 miles (400 kilometres) south east of Houston, is in 4,132 feet (1,259 metres) of water. The Tiber well was drilled to a total depth of approximately 35,055 feet (10,685 metres) making it one of the deepest wells ever drilled by the oil and gas industry. The well found oil in multiple Lower Tertiary reservoirs. Appraisal will be required to determine the size and commerciality of the discovery.

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 rebounded this year to about $70 per barrel.  The recovery 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 2009, to $59.13 in the second quarter, to $68.38 so far in the third quarter. 
  • The benchmark price of Russian oil jumped even higher, from $19.52 in the first quarter to $35.87.
  • U.S. natural gas prices have continued their long decline, from $4.91/mmbtu to $3.39.
  • BP's Refining Global Indicator Margin has also declined, from 6.20 to 3.83.

Given these figures, we expect BP's Revenue in the third quarter to fall 35 percent from $103 billion in 2008 to $67 billion.  This amount is 22 percent more than Revenue in the second quarter of 2009.

BP's Gross Margin was 22 percent last quarter, which was more profitable than the normal 16-to-20 percent range.  Because scheduled maintenance usually reduces the margin in the third quarter, we will set a 19-percent target for the margin.  In other words, we expect the Cost of Goods Sold -- which we define for BP to be Purchases, plus Production and Manufacturing Expenses, plus Production and Similar Taxes -- to be 81 percent of Revenue.  Combining this ratio with our $67 billion Revenue estimate yields a CGS prediction of $54.3 billion.

Depreciation (including Depletion and Amortization) expenses have risen to about $3.0 billion per quarter.  We assume a similar expense, which would be 4.5 percent of Revenue, in the third quarter.

Exploration costs are normally between $150 and $300 million per quarter, but were especially high last quarter.  We've selected $200 million as the target for the current quarter.

BP, in 2009, has slashed its Sales, General, and Administrative (SG&A) costs, what it calls Distribution and Administration Expenses, from about $4.0 billion to $3.3 billion per quarter.  We assume a similar expense (4.9 percent of Revenue) in the third quarter.

If there are no other special operating gains or losses, such as asset impairments, Operating Income, as we define it, would be about $6.2 billion.  This figure is 43 percent less than Operating Income in the third 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 $6.0 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 $4.1 billion ($1.31/ADR).  This is 49 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 data-heavy annual statistical review of the world energy market.  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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