28 April 2010

BP: Income Statement Analysis for the March 2010 Quarter

BP (NYSE: BP) earned $1.92 per diluted ADS in the first quarter of 2010, which ended 31 March.  The profit attributable to BP's shareholders more than doubled the $0.81 earned in 2009's first quarter.

This post examines BP's Income Statement for the latest quarter and compares the entries on each line to our "look-ahead" estimates.  Reported earnings exceeded the $1.58 per share we had forecast by $0.34, about 22 percent.

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 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.  
Additional background information about BP and the business environment in which it is currently operating can be found in 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 $73.1 billion was 55 percent more than in the first quarter of 2009.  The reported Revenue figure essentially matched our $73.0 billion estimate, which was based on oil and gas prices and global refining margins.

Oil and, to a lesser extent, natural gas prices were higher in the latest quarter than in the same quarter of 2009.

Sales in the U.S. were either 33 percent or 36 percent, depending on how the calculation is made.

The Exploration and Production unit achieved sales of $18.1 billion, up greatly from $12.3 billion.  If sales other BP units are excluded, sales at this business segment rose from $6.5 billion to $8.3 billion.

Production in the quarter averaged 4,010 million barrel-of-oil equivalents per day, essentially the same as production of 4,016 mboe/day in the March 2009 quarter. 

Refining and Marketing sales rose from $40.5 billion to $64.2 billion, excluding internal sales. 

Of the various costs and expenses reported by BP, we group (for simplicity) three items -- "Purchases," "Production and Manufacturing Expenses," and "Production and Similar Taxes" -- and call the combination Cost of Goods Sold.  In the March quarter, CGS totaled $58.7 billion or 80.3 percent of Revenue.  This equates to a Gross Margin of 19.7 percent, which is 130 basis points more profitable than the comparable March 2009 value of 21.0 percent. 

Although down from last year, the latest Gross Margin was a little better, 20 basis points, than we expected.

The Global Indicator Refining Margin plunged from $6.20 in last year's first quarter to $3.08 per barrel, although it was higher than last December. Refining availability improved from 92.3 percent to 95.3 percent, a big jump to the highest availability since 2004.

The Depreciation (including Depletion and Amortization) expense of $3.0 billion was 6 percent more than last year's $2.82 billion.  As a percentage of Revenue, this expense declined from 6.0 percent to 4.1 percent.   The reported Depreciation was less than our $3.2 billion estimate by 6.4 percent.

The Exploration expense in the first quarter, $120 million, was about the same as last year's $119 million.  We had used $300 million for an estimate of these costs.

Distribution and Administration Expenses, which we treat as Sales, General, and Administrative expenses, decreased by 10 percent, from $3.35 billion to $3.02 billion.  This expense item was less than our $3.4 billion estimate by 11 percent.

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 first quarter, the "Other" category consisted of a $146 million "Fair value gain ... on embedded derivatives."  We had budgeted for a charge of $100 million.

Subtracting the various operating expenses from Revenue yields Operating Income of $8.4 billion, a far better result than Operating Income of $3.35 billion in 2009's first quarter. Operating Income beat our $7.235 billion estimate by 16 percent because most operating expenses were lower-than-expected.

We treat sales of businesses and fixed assets (and related impairments) as a non-operating item.  In the first quarter of 2010, BP has a $126 million loss, net of impairments, on asset sales.  The loss was more significant than the $50 million we had estimated.

Interest and other financial items summed to a net expense of $86 million, down from $165 million in the year-earlier quarter.  Our target for this item was $150 million.

The effective income tax rate was a less-than-typical 38.8 percent. Our estimate was 40.0 percent. 

After-tax earnings from jointly controlled entities and associates added $1.06 billion to the bottom line, which was more than our estimate of $800 million.

The overall profit for the quarter was $6.08 billion ($1.92/ADS), compared to $2.56 billion ($0.81/ADS) last year.  The actual results were significantly more profitable than our $5.02 billion ($1.58/ADS) estimate.  The surplus, as explained above, was mostly due to lower-than-expected operating expenses, the gain on embedded derivatives, and better-than-expected earnings from jointly controlled entities.

Unfortunately for BP, as well said in an article by the Telegraph's Garry White: "The tragic situation in the Gulf of Mexico has taken the shine off what was an excellent performance from BP in the first quarter of the year."

Notes:  The chart showing oil and natural gas prices over time was included in BP's Strategy Presentation [2.5 MB pdf] of 2 March 2010.

Full disclosure:  Long BP at time of writing

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