BP (NYSE: BP) earned $0.56 per diluted ADS in the September-ending third quarter of 2010, down 67 percent from $1.69 in the same three months of last year.
In the most recent quarter, BP recorded a charge of $7.656 billion ($5.052 billion after taxes) for expenses related to the tragic explosion and oil spill
in the Gulf of Mexico on 20 April 2010. Excluding the charge, BP
earned about $2.16 per ADS in the September 2010 quarter, 27 percent
more than last year.
This post examines BP's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates. Because the special charge was far greater than we anticipated, reported earnings were $0.93 less than our $1.49 EPS estimate.
The principal sources for the income statement analysis were the earnings announcement and ensuing the conference call transcript [pdf] and 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, Growth, Profitability and Value.
Before getting into the details, we will take a step back to introduce the subject of today's analysis.
BP p.l.c. is a major Integrated Oil and Gas firm. Formerly known as British Petroleum, BP became a behemoth by merging with Amoco in 1998 and acquiring Arco soon thereafter.
Headquartered in London, BP has worldwide interests. The company operates Alaskan oil fields and pipelines, and it had become the "largest producer in the Gulf of Mexico." BP also owns 50 percent of the TNK-BP joint venture with Russian partners.
An estimated 5 million barrels of crude oil flowed from the Macondo area of the Gulf of Mexico before the damaged Mississippi Canyon 252 well was permanently sealed in September. BP had obtained the Deepwater Horizon drilling rig, which was destroyed, from Transocean (NYSE: RIG).
As a consequence of the tragic events in the Gulf of Mexico, before and after the explosion, BP's board ousted CEO Tony Haywood and replaced him with a safety-conscious Bob Dudley. It didn't help Mr. Haywood that the Gulf disaster followed a string of other BP difficulties, including tragedies, maintenance problems, and market manipulation allegations. Haywood himself had risen to the top job after an earlier ignominious leadership change.
To cover the disaster's costs, including a $20 billion compensation claims fund, BP had recorded pre-tax charges of near $40 billion. To raise cash, BP might sell as much as $40 billion of assets (up from $30 billion) over an 18-month period. In one deal, Apache (NYSE: APA) agreed to spend $7 billion to purchase assets in Canada, Egypt, and the Permian Basin of West Texas and New Mexico.
BP's market value fell from $190 billion in April 2010 to $90 billion in June. The market value has since recovered to about $130 billion.
Please click here to see
a 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.
(i.e., Sales and Other Operating Revenues) of $70.6 billion was 6.6
percent more than $66.2 billion in the third quarter of 2009. The
is dependent, for the most part, on how much oil and natural gas it
produces and refines and the prices at which various energy products are
bought and sold. The latest Revenue amount, which was lower than in
the second quarter, fell short of our $75.0 billion estimate by 5.9
oil and gas prices realized by BP in the most recent quarter were 12.3
percent and 39.5 percent, respectively, higher than last year.
in the U.S. were about 1/3 of BP's total sales in the third quarter of
2010. The U.S. share of total sales was only modestly less than in
2009's third quarter.
The Exploration and Production unit
achieved sales of $15.2 billion, up from $14.9 billion in the September
2009 quarter. If sales to other BP units are excluded, Exploration and
Production's sales rose from $5.3 billion to $6.5 billion.
Production in the quarter averaged 3.76 million barrel-of-oil equivalents
per day, down 4 percent from the third quarter of last year. It's not
clear how much of the production decline was due to the Gulf of Mexico
Refining and Marketing sales rose from $60.3 billion to
$63.6 billion, excluding internal sales. BP's average Global Indicator
Refining Margin improved from $3.42 to $4.53 per barrel, a 32-percent
jump. Refining availability improved from 94.3 percent to 95.0 percent.
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 September 2010 quarter, we are excluding the $7.656 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 $58.6 billion or 83.0 percent of Revenue. This equates to a Gross Margin of 17.0 percent, which is 240 basis points less profitable than its 19.4-percent value in the September 2009 quarter.
The latest Gross Margin missed our 18.5-percent estimate by 150 basis points.
(including Depletion and Amortization) expense of $2.75 billion was 7.9
percent less than last year's $3.0 billion. As a percentage of Revenue,
this expense declined from 4.5 percent to 3.9 percent. The Depreciation
expense was less than our estimate of $3.0 billion.
Exploration expense in the first quarter, $160 million, was down
considerably from last year's $378 million. Our projection was $200
Distribution and Administration Expenses, which we treat as Sales, General, and Administrative
expenses, decreased by 6.8 percent, from $3.42 billion to $3.19
billion. The reported number was 6.2 percent more than our $3.0 billion
BP treats the $7.7 billion charge related to the oil spill in the Gulf
of Mexico as a non-operating expense, but we've decided to list it as an
operating item. (As noted above, our
organization of revenues, expenses, gains, and losses can and often does
differ in material respects from company-used formats.) The charge was nearly four times our $2.0 billion placeholder for additional oil-spill expenses.
stated that the special charge was required because of "higher ongoing
response costs due to the delay in the completion of the relief well,
additional costs related to decontamination and demobilization of
vessels involved in the response, claims center administration costs,
and additional legal costs."
year-to-date $40-billion charge related to the oil spill "comprises
costs incurred up to 30 September 2010, estimated obligations for future
costs that can be estimated reliably at this time and rights and
obligations under the escrow account. "
Subtracting the various
operating expenses from Revenue yields an operating loss of $1.75
billion. If the oil-spill charge is excluded, Operating Income was $5.9 billion.
treat sales of businesses and fixed assets (and related impairments) as
a non-operating item. In the third quarter of 2010, BP had a $2.2
billion gain, net of impairments, on asset sales. This surpassed our
$1.0 billion estimate.
Interest and other financial items summed
to a net expense of $128 million, down from $154 million in the
year-earlier quarter. Our target for this item was $100 million.
recorded a $292 million credit for income taxes, which includes a
credit of $2.6 billion in connection with the oil spill charge.
earnings from jointly controlled entities and associates added $1.1
billion to earnings. We had expected $800 million.
At the bottom line, Net Income
for the quarter was $1.785 billion ($0.56/ADS), compared to $5.34
billion ($1.69/ADS) last year. If we exclude the special charge and tax
benefit, BP earned roughly $6.8 billion ($2.16/ADS).
the oil spill charge was much higher than we anticipated, Net Income
fell significantly short of our $4.75 billion ($1.49/ADS) estimate.
summary, BP earned a profit in the quarter even though it recorded a
steep, pre-tax charge of $7.7 billion. Sales growth was positive, but
it wasn't as robust as we had expected based on energy prices. Lower
production was a negative factor. The Gross Margin, as we define it,
was also lower than we expected. On the plus side, gain on asset sales
and earnings from associates and jointly controlled entities were better
than we had expected. Earnings excluding the special charge were
better than the results of the year-earlier quarter by a substantial
Full disclosure: Long BP at time of writing