27 March 2010

BP: Look Ahead to March 2010 Quarterly Results

This post describes our model of BP's (NYSE: BP and LON: BP) Income Statement for the first quarter of 2010, which will end on 31 March.

The purpose of the model is to establish a baseline for identifying surprises, positive or negative, in the quarterly results that will soon be reported.  Estimates for each line of the Income Statement are derived from management's guidance, the company's historical financial results, and other publicly available data.

We begin by reviewing background information about BP and the business environment in which it is currently operating.
BP Strategy Presentation, 2 March 2010, Slide 12

BP p.l.c., the former British Petroleum, is one of the largest Integrated Oil and Gas firms in the world.  It has a market capitalization over $170 billion, and its Revenue was almost $240 billion in 2009.  Already large, BP became a behemoth by merging with Amoco in 1998 and acquiring Arco soon thereafter.

The company produced 4 million barrel-of-oil equivalents per day in 2009, and its annual Revenue was $240 billion. 

Its operations span the globe.  In North America, BP is a significant operator of Alaskan oil fields and pipelines and is the "largest producer 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
BP Strategy Presentation, 2 March 2010, Slide 20

BP recently acquired interests in a promising offshore area of Brazil, as part of a $7 billion deal with Devon Energy (NYSE: DVN).  BP and Devon will also jointly develop an oil sands project in Alberta.  Separately, BP also obtained a share of a second Albertan oil sands project.

BP has also invested in the gas-producing shale area on the U.S. mainland.  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 were have calmed

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.

BP has experienced numerous difficulties in the last few years, including tragedies, maintenance problems, market manipulation allegations, and an ignominious leadership change.

BP Strategy Presentation, 2 March 2010, Slide7

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 2008, but the price has rebounded to $80.  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.

We're now ready to look ahead to BP's results for the March 2010 quarter.

BP makes scads of operating information available to investors, and the company's annual strategy review on 2 March 2010 with the financial community is a good resource.  However, the company does not issue quarterly guidance that directly translates into Income Statement figures.  So, we have to examine the fundamentals. 

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 $74.53 in the fourth quarter. 
  • The benchmark price of Russian oil jumped from $19.52 in the first quarter to $35.83.
  • U.S. natural gas prices fell from $4.91/mmbtu to $4.16, but were over $5 in the first quarter of 2010.
  • BP's Refining Global Indicator Margin has plunged from 6.20 to 1.49, but has bounced back to almost 3.0 in the current quarter.

Given these figures, we estimate BP's Revenue in the first quarter will be around $73 billion, which would be 33 percent more than the weak $47.3 billion in the same quarter of 2009.

BP's Gross Margin, as we define it, was between 19 and 22 percent in 2009.  We are choosing 19.5 percent as our target for the first quarter because refining margins remain weak but off their lows.  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 80.5 percent of Revenue.  Combining this ratio with our $73 billion Revenue estimate yields a CGS prediction of $58.8 billion.

Depreciation (including Depletion and Amortization) expenses will probably be near the $3.2 billion figure reported last quarter.

We also expect Exploration costs around $300 million based on the expenses reported in recent quarters.

BP had trimmed Sales, General, and Administrative (SG&A) costs, what it calls Distribution and Administration Expenses, but the amount bounced back up to $4 billion in the last quarter.  We will assume that it was boosted by one-time expenses and look for SG&A of $3.4 billion in the March quarter.

We'll use $100 million expense as a placeholder for special operating gains or losses, such as asset impairments.  Rolling up the Revenue and Operating Expense figures yields  Operating Income, as we define it, of $7.2 billion.  Operating income was a weaker $3.85 billion in the year-earlier quarter.

For the non-operating income and expense items reported by BP, a $200 million expense seems like a reasonable target.  This brings our estimate for pre-tax income to $7.0 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 $5.0 billion ($1.58/ADR). 

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.

Notes:  Several figures above were extracted from the BP's Strategy Presentation [2.5 MB pdf] of 2 March 2010.

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

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