27 October 2009

BP: Income Statement Analysis for the September 2009 Quarter

BP (NYSE: BP) surpassed expectations by achieving a $1.69 per ADR profit attributable to shareholders in the third quarter of 2009, which ended 30 September.  The profit in the same period last year was $2.58/ADR.

This post examines the Group Income Statement for the quarter in the earnings announcement, and it compares the entries on each line to our "look-ahead" estimates.   Our target for BP's Net Income in the quarter was $1.31 per share.

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 various financial metrics we use to analyze Cash Management, GrowthProfitability and Value.

Some background information about BP and the business environment in which it is currently operating can be found in the beginning of the look-ahead.  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

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.

Revenue (i.e., Sales and Other Operating Revenues) was 35.8 percent less than in the third quarter of 2008, which was slightly worse than our estimate of a 35.1 percent decline. 

However, Revenue was 20.9 percent more than in this year's second quarter.
Reported production, on a barrel-of-oil equivalent basis, was 7 percent more than in last year's third quarter.  Production would have risen 4 percent if there had not been hurricanes in the earlier period.

Revenue from the Refining and Marketing business was up $11 billion from last quarter, but it was still 34.5 percent less than last year's figure when oil prices were much higher.

Refining availability increased to 94.3 percent, from 93.6 percent in the second quarter, and 87.7 percent in last year's third quarter.

BP's Cost of Goods Sold (CGS) -- which we define to be Purchases, Production and Manufacturing Expenses, and Production and Similar Taxes -- was 80.6 percent of Revenue.  This equates to a Gross Margin of 19.4 percent, which compares favorably to our 19.0 percent prediction.  The Gross Margin in the year-earlier quarter was only 16.0 percent.

Depreciation (including Depletion and Amortization) matched our $3.0 billion estimate.  The reported figure was 4.5 percent of Revenue.

Exploration costs in the third quarter were almost double our $200 million estimate.

Sales, General, and Administrative (SG&A) expenses, which BP calls Distribution and Administration Expenses, were 3.6 percent more than our $3.3 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 third quarter, the Other category consisted of a $370 million "Fair value gain ... on embedded derivatives."

Operating Income, which is the difference between Revenue and the operating expenses identified above, decreased by 41.2 percent, when compared to the September 2008 quarter. The gain on derivatives helped Operating Income nose ahead of our prediction by 3 percent.

The quarterly results benefited from a $202 million gain on the sale of a business, less impairment charges of $157 million.  The interest expense was greater than last year, but it was less than we anticipated.

The income tax rate was 35.4 percent. Our estimate was 40 percent. 

After-tax earnings from jointly controlled entities and associates added $1.26 billion, far more than our estimate of $500 million.

The bottom-line Profit for the quarter was $5.3 billion ($1.69/ADR), which was 34 percent less than earnings in the year-earlier quarter.  These results surpassed our $1.31 estimate, in large measure because of the performance of the joint ventures and associated companies.

Revenue, Operating Income, and Net Income all dropped significantly relative to the same period of last year when energy prices were much higher.  However, the results exceeded our expectations.  Production, refining availability, and the Gross Margin were all up. 

Full disclosure:  Long BP at time of writing

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