27 July 2010

BP: Income Statement Analysis for the June 2010 Quarter

BP (NYSE: BP) lost about $5.41 per diluted ADS in 2010's second quarter, which ended 30 June.  This figure compares to the profit attributable to BP's shareholders of $1.39 in the second quarter of 2009.

As a result of the tragic drilling rig explosion and oil spill in the Gulf of Mexico on 20 April 2010, the second quarter included a pre-tax charge of $32.2 billion, which includes the $20 billion compensation claims fund.  On an after-tax basis, the charge was about $22 billion (approximately $6.94 per ADS).

This post examines BP's Income Statement for the latest quarter.  Because of the uncertainty about the Gulf disaster's costs and how BP would account for them, we did not issue "look-ahead" estimates prior to the company's report.  We normally compare each line of the Income Statement to our estimates.

The principal sources for the income statement analysis were the earnings announcement, a supplemental press release, 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.

Before getting into t
he details, we will take a step back to introduce the subject of today's analysis.

BP p.l.c., the former British Petroleum, is a large Integrated Oil and Gas firms with worldwide interests.
  The Deepwater Horizon disaster has caused BP's market value to fall from $190 billion to $120 billion on a fully diluted basis. 

Already large, BP became a behemoth by merging with Amoco in 1998 and acquiring Arco soon thereafter.

With operations that span the globe, BP produced 4 million barrel-of-oil equivalents per day in 2009, and its annual Revenue was $240 billion.  However, BP's recent announcement that it would sell "up to $30 billion" in assets over the next 18 months will shrink the company.

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 $73.7 billion was 34.6 percent more than in the second quarter of 2009.  The oil and gas prices realized by BP in the most recent quarter were 39.3 percent and 31.5 percent, respectively, higher than last year.

Sales in the U.S. were 34.3 percent of BP's total sales in the second quarter of 2010.  The U.S. share of total sales was almost exactly the same in 2009's second quarter.

The Exploration and Production unit achieved sales of $15.2 billion, up from $12.8 billion in the June 2009 quarter.  If sales to other BP units are excluded, Exploration and Production's sales rose from $5.3 billion to $6.2 billion.

Production in the quarter averaged 3,846 million barrel-of-oil equivalents per day, down 4 percent from the second quarter of last year.  It's not clear how much of the production decline was due to the Gulf of Mexico disaster.

Refining and Marketing sales rose from $49.1 billion to $67.0 billion, excluding internal sales.  BP's average Global Indicator Refining Margin improved from $4.98 to $5.49 per barrel.  Refining availability improved from 93.6 percent to 94.6 percent.

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 June 2010 quarter, we are excluding the $32.2 billion Gulf of Mexico charge (reported as a Production and Manufacturing Expense) from CGS and treating it as a special operating item.  On this basis, CGS totaled $61.6 billion or 83.5 percent of Revenue.  This equates to a Gross Margin of 16.5 percent.  The Gross Margin was a much more profitable 22.1 percent in the June 2009 quarter.

The Depreciation (including Depletion and Amortization) expense of $2.8 billion was 10.1 percent less than last year's $3.1 billion.  As a percentage of Revenue, this expense declined from 5.8 percent to 3.6 percent.

The Exploration expense in the first quarter, $132 million, was down considerably from last year's $437 million.

Distribution and Administration Expenses, which we treat as Sales, General, and Administrative expenses, decreased by 10.7 percent, from $3.3 billion to $2.9 billion.

The Other Operating Items category, a catchall grouping as we define it, is dominated by the $32.2 billion charge for the oil spill in the Gulf of Mexico.  The charge includes "obligations for future costs which can be reliably estimated."   Actual costs incurred through 30 June 2010 were $2.9 billion.  The spill response involves more than 6,390 vessels and approximately 40,000 onshore people.

Subtracting the various operating expenses from Revenue yields Operating Income of minus $26.3 billion.  If the oil spill charge is excluded, Operating Income was $5.9 billion or 6.1 percent better than in last year's second quarter.

We treat sales of businesses and fixed assets (and related impairments) as a non-operating item.  In the second quarter of 2010, BP has a $1.03 billion gain, net of impairments, on asset sales. 

Interest and other financial items summed to a net expense of $56 million, down from $130 million in the year-earlier quarter.  Our target for this item was $150 million.

BP recorded a $10.0 income tax benefit because of the $32.2 billion special charge.  If the benefit is excluded, the estimated effective income tax rate was 39.6 percent.  This rate is consistent with the company's historical results.

After-tax earnings from jointly controlled entities and associates added $915 million to the bottom line.

The overall loss for the quarter was $17.15 billion (minus $5.41/ADS), compared to income of $4.385 billion ($1.39/ADS) last year.  If we exclude the special charge and tax benefit, BP earned $5.04 billion ($1.59/ADS).

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

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