14 December 2009

BP: Look Ahead to December 2009 Quarterly Results

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

In October, we examined BP's Income Statement for the September quarter and compared the entries on each line to our "look-ahead" estimates.  We later performed a financial gauge analysis of BP, which determined that the GCFR Overall gauge fell from 30 of the 100 possible points to 21 (recalculated).

We have now modeled BP's Income Statement for the quarter that will end on 31 December 2009.  The intent of this exercise was to produce a baseline for identifying deviations, positive or negative, in the actual data that the company will announce on 2 February 2010.  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 BP and the business environment in which it is currently operating.

BP p.l.c. (NYSE: BP), the former British Petroleum, has the third highest Revenue among major Integrated Oil and Gas firms.  Other large companies in this industry include Exxon Mobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS.A), Chevron Corp. (NYSE: CVX), PetroChina (NYSE: PTR), Petroleo Brasileiro (NYSE: PBR), and ConocoPhillips (NYSE: COP).

The company's operations span the globe. 

In North America, BP's acquisitions of Amoco and Arco made it a significant operator of Alaskan oil fields and pipelines.  In addition, BP is currently the "largest leaseholder in the Gulf of Mexico."  One BP-operated project, Thunder Horse, is "the second largest producing field in North America, after Prudhoe Bay."  In September 2009, BP announced another "giant" oil discovery" at the Tiber Prospect in the deepwater of the Gulf of Mexico.

BP paid Chesapeake Energy (NYSE: CHK) a total of $3.65 billion in 2008 for a stake in Arkansas's Fayetteville Shale field and an interest in Oklahoma's gas-producing shale properties.

In Russia, BP owns 50 percent of the TNK-BP joint venture.  BP has had a rocky relationship with its Russian partners, but disputes over control of TNK-BP were eventually settled.  Maxim Barsky will become the venture's next CEO, but not until January 2011.

In Central Asia, BP recently sold its 46 percent share of Lukarco, which owns small stakes in the Tengiz oil field in Kazakhstan and a pipeline between Russia and Kazakhstan, for $1.6 billion in cash.

In the Mideast, BP and China National Petroleum are investing billions to increase production at the Rumalia oil field near Basra.  The companies won the right to develop this field, the largest in Iraq, in June 2009.

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 per barrel by the end of last year, but the price has rebounded above $70 in 2009.  The higher price has been attributed to optimism about the economy, fears of a weaker dollar, and greater compliance with output quotas.

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

The energy price roller coaster has not been the only challenge faced by BP in the last few years.  The company has suffered tragedies, maintenance problems, market manipulation allegations, and an ignominious leadership change.

We're now ready to look ahead to the fourth quarter's results.

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 rebounded from $44.46 in the first quarter of 2009 to $74.87 in the fourth quarter to date. 
  • The benchmark price of Russian oil  jumped from $19.52 in the first quarter to $35.98.
  • U.S. natural gas prices have shown some recent strength.  After falling from $4.91/mmbtu to $3.39, the average price in the current quarter to date is $4.16.
  • BP's Refining Global Indicator Margin has plunged from 6.20 to 1.10.
Given these figures, we estimate BP's Revenue in the fourth quarter will be about $72 billion, 17 percent more than last year's $61.5 billion.

BP's Gross Margin, as we define it, has been around 20 percent, with substantial volatility, in recent quarters.  Given the collapse in refining margins, we are choosing 19 percent as our target for the margin in the fourth quarter.  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 $72 billion Revenue estimate yields a CGS prediction of $58.3 billion.

Depreciation (including Depletion and Amortization) expenses have risen to about $3.0 billion per quarter.  We assume a similar expense in the fourth quarter.

Exploration costs were almost $400 million in the third quarter, and we are assuming a similar figure for the fourth quarter.

BP, in 2009, has slashed Sales, General, and Administrative (SG&A) costs, what it calls Distribution and Administration Expenses, from about $4.0 billion to roughly $3.4 billion per quarter.  We assume a similar expense in the fourth quarter.

If there are no other special operating gains or losses, such as asset impairments, Operating Income, as we define it, would be about $6.9 billion.  BP lost $1.7 billion on an operating basis in the fourth 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 brings our estimate for pre-tax income close to $6.7 billion.

If the income tax rate is 40 percent, and if after-tax earnings from jointly controlled entities and associates total $800 million (a shaky estimate), Net Income will be about $4.8 billion ($1.52/ADR). 

The fourth quarter of 2008 included a $1.62 billion charge for "Impairment and losses on sale of businesses and fixed assets." 


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: Tradingcharts.com was the source of the crude oil and natural gas charts.  Yahoo Finance was the source for the historical ADR price chart.

Full disclosure:  Long BP and COP at time of writing.  No position in any other security mentioned.

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