BP (NYSE: BP) earned $1.76 per diluted ADS in the December-ending fourth quarter of 2010, up 29 percent from $1.36 in the same three months of 2009.
the most recent quarter, BP recorded a charge of $1.01 billion ($753
million after taxes, $0.24 per share) for expenses related to the oil spill
in the Gulf of Mexico on 20 April 2010. In 2010 as a whole, the charge
for this tragic event was $40.858 billion ($28 billion after taxes,
$12.89 per share).
This post examines BP's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates. Reported earnings were $0.11 more than our $1.65 EPS estimate.
The principal sources for the income statement analysis were the earnings announcement and ensuing 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, 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 with worldwide interests. The company's many energy projects include Alaskan oil fields and pipelines and a 50-percent stake in the TNK-BP joint venture in Russia.
Headquartered in London, the former British Petroleum became a behemoth by merging with Amoco in 1998 and acquiring Arco and Burmah Castrol soon thereafter.
2010, BP lost $3.7 billion on revenue of $309 billion, with the loss
due to charges associated with oil spill. In 2009, BP achieved profits
of $16.6 billion on sales and other operating revenues of $239 billion.
The company recently announced a new joint venture with Rosneft, including an $8 billion swap of equity shares, to develop energy resources in Russia's north. This deal did not please BP's TNK-BP partners.
BP operated the Deepwater Horizon drilling rig that failed with tragic results in April 2010 in the Macondo area of the Gulf of Mexico. An estimated 5 million barrels of crude oil flowed from Mississippi Canyon 252 well into the Gulf of Mexico, where BP had been a large producer, before the well was permanently sealed in September 2010.
As a consequence of the events in the Gulf of Mexico, before and after the disaster, 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.
BP's share price plunged as a result of the Gulf oil spill, causing the company's market value to fall from $190 billion in April to $90 billion in June 2010. The market value has since recovered to about $150 billion.
To cover the disaster's costs, including a $20 billion compensation claims fund,
BP recorded a pre-tax charge of $32.2 billion in second quarter of 2010
and an additional charge of $7.656 billion ($5.052 billion after taxes)
in the third quarter.
BP indicated it would sell as much as $40 billion of assets to raise cash. 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.
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 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 $79.7 billion was 12.3
percent more than $71.0 billion in the fourth quarter of 2009. Revenue
surpassed our $72.0 billion estimate by 10.7 percent.
the U.S. were 31.5 percent of BP's total sales in the December 2010
quarter. The U.S. share of total sales was nearly unchanged from the
same quarter of 2009.
company's Revenue 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 oil and gas prices realized by
BP in the most recent quarter were 15.8 percent and 8.2 percent,
respectively, higher than last year.
The Exploration and
Production unit achieved sales of $17.8 billion, up from $17.6 billion
in the December 2009 quarter. If sales to other BP units are excluded,
Exploration and Production's sales rose from $8.0 billion to $8.2
Production in the quarter averaged 3.67 million barrel-of-oil equivalents
per day, down 9 percent from the fourth quarter of 2009. It's not
clear how much of the production decline was due to the Gulf of Mexico
Refining and Marketing sales rose from $62.3 billion to
$70.7 billion, excluding internal sales. BP's average Global Indicator
Refining Margin improved from $1.49 to $4.64 per barrel, a 211-percent
jump. Refining availability improved from 94.4 percent to 94.9 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 December 2010 quarter, we are excluding the $1.01 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 $66.4 billion or 83.3 percent of Revenue. This equates to a Gross Margin of 16.7 percent, which is 250 basis points less profitable than its 19.2-percent value in the December 2009 quarter.
The latest Gross Margin missed our 18.0-percent estimate by 130 basis points.
(including Depletion and Amortization) expense of $2.63 billion was 18
percent less than last year's $3.2 billion. As a percentage of Revenue,
this expense declined from 4.5 percent to 3.3 percent. The reported
Depreciation expense was 5.9 percent less than our estimate of $2.8
The Exploration expense in the fourth quarter, $431
million, was up considerably from last year's $272 million. Our
projection was $200 million.
Distribution and Administration Expenses, which we treat as Sales, General, and Administrative
expenses, decreased by 14.3 percent, from $4.0 billion to $3.4
billion. The reported number was 13.6 percent more than our $3.0
BP treats the $1.0 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 $250 million placeholder for special operating charges.
stated that the fourth-quarter charge was required because of "higher
costs than previously provided in relation to operational response
activities, costs for claims administration, and as a result of a change
in the discount rate for the liability to fund the Trust, partially
offset by lower decontamination costs."
$40.9-billion charge related to the oil spill "costs incurred up to 31
December 2010, estimated obligations for future costs that can be
estimated reliably at this time and rights and obligations relating to
the trust fund."
Subtracting the various operating expenses identified above from Revenue yields Operating Income of $5.82 billion, down 4.6 percent from $6.1 billion in the fourth quarter of 2009.
lower Gross Margin and the greater-than-expected expense, partially
offset by better-than-expected revenue, resulted in Operating Income
falling below our $6.7 billion estimate by 13.2 percent.
treat sales of businesses and fixed assets (and related impairments) as a
non-operating item. In the fourth quarter of 2010, BP had a $1.55
billion gain, net of impairments, on asset sales. This exceeded our
$800 million estimate.
Interest and other financial items summed
to a net expense of $172 million, up from $61 million in the
year-earlier quarter. Our target for this item was $100 million.
effective income tax rate of 40.2 percent led to an $2.9 billion
provision for income taxes. The latest quarter also included after-tax
earnings from jointly controlled entities and associates of $1.26
billion, whereas we had expected $800 million.
These last items gets us to the bottom line. Net Income for the quarter was $5.57 billion ($1.76/ADS), compared to $4.3 billion ($1.36/ADS) in the same period of 2009.
larger-than-expected gain on asset sales and joint-venture income
resulted in Net Income exceeding our $5.25 billion ($1.65/ADS) estimate
by about 6 percent.
In summary, BP earned a healthy profit
in the quarter even though it recorded a another Gulf of Mexico oil
spill charge of $1.1 billion. Sales growth was more robust than we had
expected based on energy prices, but lower production was a negative
factor. The Gross Margin, as we define it, was also lower than we
expected, which squeezed earnings. On the plus side, gain on asset
sales and earnings from associates and jointly controlled entities were
better than we had expected.
BP announced it would resume dividend payments to shareholders. The first payment will be $0.42 per ADS.
1. The Production chart above was extracted from the BP's Strategy Presentation [2.5 MB pdf] of 2 March 2010.
2. The U.S. Energy Information Administration is a source for energy prices and related data.
Full disclosure: Long BP at time of writing