02 February 2010

BP: Income Statement Analysis for the December 2009 Quarter

BP (NYSE: BP) earned $1.36 per diluted ADS in the quarter that ended 31 December 2009.  This fourth-quarter profit attributable to shareholders more than reversed the $1.07 loss per ADS in the same quarter of 2008.

This post examines BP's Income Statement for the latest quarter and compares the entries on each line to our "look-ahead" estimates.   Our target for BP's profit in the quarter was $1.52 per ADS, a substantial $0.16 less than the reported amount.

The principal sources for the income statement analysis were the earnings announcement, the financial statements (parts one and two), and the conference call presentation [pdf].

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.
BP, the former British Petroleum, is a major Integrated Oil and Gas company.  It is a significant operator of Alaskan oil fields and pipelines, and it is currently the "largest leaseholder in the Gulf of Mexico."  BP owns 50 percent of the Russian TNK-BP joint venture.  Additional background information about BP and the business environment in which it is currently operating can be found in the beginning of the look-ahead.

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) of $71.0 billion was 15.5 percent more than in the fourth quarter of 2008.  Our $72.0 billion estimate, which was based on oil and gas prices and global refining margins, was too high by 1.4 percent.

Sales achieved by the Exploration and Production business segment, including sales to other BP units, increased from $15.3 billion to $17.6 billion in the quarter.  BP produced oil and gas at a rate of 4,054 million barrel-of-oil equivalent per day in the fourth quarter, up 3 percent from the same period of 2008.  The company announced it replaced 129 percent of its reserves, making 2009 the seventeenth consecutive year of reserve growth.

Sales at the Refining and Marketing business rose from $53.1 billion to $62.6 billion.  However, the global refining indicator margin plunged from $5.20 to $1.49 per barrel.  Refining availability improved from 91.4 percent to 94.4 percent.

BP's Cost of Goods Sold (CGS) -- which we define to be Purchases, Production and Manufacturing Expenses, and Production and Similar Taxes -- was 80.8 percent of Revenue.  This equates to a Gross Margin of 19.2 percent, which compares favorably to our 19.0 percent estimate. 

Depreciation (including Depletion and Amortization) of $3.2 billion (4.5 percent of Revenue) exceeded our $3.0 billion estimate.

Exploration costs in the fourth quarter of $272 million were up $33 million from last year, but were well below our $400 million estimate.

Sales, General, and Administrative (SG&A) expenses, which BP calls Distribution and Administration Expenses, of $4.0 billion were much higher than in any of the first three quarters of 2009.  These expenses were 17 percent more than our estimate.  It's possible that a non-recurring charge of some type boosted the number.

Other Operating income and expenses is a catchall category.  Items of this sort are erratic and, as far as we can tell, unpredictable from quarter to quarter.  In the fourth quarter, the Other category consisted of a $103 million "Fair value loss ... on embedded derivatives."

These various operating items combined to produce Operating Income of $6.1 billion, compared to an operating loss of $1.7 billion in 2008's weak fourth quarter.  Operating Income fell short of our $6.9 billion estimate by 11.3 percent because of lower-than-expected Revenue and greater-than-expected Depreciation and SG&A expenses.

The quarterly results were hurt by a $1.8 billion impairment charge, partially offset by a $1.4 billion gain on the sales of businesses and fixed assets.  The charge included the complete write-off of all Refining and Marketing goodwill associated with U.S. West Coast assets that were acquired as part of Arco in 2000.  The charge recognized the lower value of refining assets in the current environment.

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

The interest expense was less than last year and less than we anticipated.

The income tax rate was 40.4 percent, just a bit more than our 40.0-percent estimate. 

After-tax earnings from jointly controlled entities and associates added $963 million, which was more than our estimate of $800 million.

The bottom-line profit for the quarter was $4.3 billion ($1.36/ADS), compared to a loss last year.  The actual results were significantly less than our $4.8 billion ($1.52/ADS) estimate.  This shortfall was due, as explained above, to lower-than-expected Revenue, greater-than-expected Depreciation and SG&A expenses, and the very large Arco impairment charge, partially offset by the gain on the sale to Lukoil.

Full disclosure:  Long BP at time of writing

1 comment:

  1. I waited too long to buy BP. On the FTSE they feel from over 700p to less than 300p. I was going to wait until they reached 280p but they didn't. Now they are over 380p.