BP Plc (BP) has reported fourth-quarter 2011 earnings of $1.59 per American Depositary Share (ADS) on a replacement cost basis, excluding non-operating items. Results were above the Zacks Consensus Estimate of $1.57 and higher than the year-earlier adjusted profit level of $1.39. The outperformance is attributable to higher realizations partially offset by lower production, primarily in the Gulf of Mexico (GoM) region as well as associated costs related to rig standby in the region.

In 2011, BP reported earnings of $6.88 per ADS on a replacement cost basis, excluding non-operating items, surpassing the Zacks Consensus Estimate of $6.72 and showing an improvement from the year-earlier adjusted profit level of $6.46.

Revenue soared 14.7% year over year to $96.3 billion in the quarter, handily beating the Zacks Consensus Estimate of $86.2 billion.

For full year 2011, BP registered revenue of $386.5 billion versus $308.9 billion in the prior year. Revenue beat the Zacks Consensus Estimate of $365.1 billion.

Price Realization and Production

The company sold oil for $101.84 per barrel in the fourth quarter (versus $78.80 in the year-earlier quarter) and natural gas for $5.07 per thousand cubic feet (versus $3.98 a year ago). Total production was 3.5 MMBoe/d (million barrels of oil equivalent per day), down 5% year over year. The Upstream segment also experienced a 5.6% year-over-year decrease in profit.

The volume loss was mainly due to the asset sale program that BP undertook to cover costs related to the GoM disaster. Higher maintenance activities were also responsible for the decline as the company seeks to improve safety. This was partially offset by the ramp-up of production at Greater Plutonio as well as the commissioning of Pazflor in Angola.

Refining and Marketing (R&M) Performance

The R&M business segment posted a profit of $564 million, compared with $964 million in the year-ago quarter. The quarterly result reflects the effect of the reduced refining margin environment, lower petrochemicals margin as well as foreign exchange impacts. However, these negatives were partially mitigated by the superior refining environment and stronger supply and trading contributions.

Refining Marker Margin decreased to $9.10 per barrel from $9.98 in the fourth quarter of 2010. Total refinery throughput increased marginally to 2,454 thousand barrels per day (MB/d) from 2,420 MB/d in the year-earlier period. Refining availability increased to 95.3% from 94.9% in the year-earlier quarter.

Capital Expenditure (Capex) and Asset Sale

In the reported quarter, BP’s total capex was $7.6 billion as against $5.5 billion in the year-earlier quarter. Notably, of the total capex, $6.3 billion was organic. The full-year organic capex was $19.1 billion.

BP is well on track with the planned divestiture of a number of its non-strategic assets. Disposal proceeds for the full year were $2.7 billion.

BP has reduced its divestment program to $38 billion over the period of 2010-2013 from the previously announced $45 billion.

Balance Sheet

The company’s net debt was $29.0 billion at the end of the fourth quarter compared with $25.9 billion a year ago. Net debt-to-capitalization ratio was 20.5% compared with 21.2% in the fourth quarter of 2010.

Net cash provided by operating activities was $5.0 billion versus net cash used by operating activities of $0.2 billion in the year-ago quarter.

Company Outlook

BP expects production in 2012 to remain on par with 2011 levels, excluding production from TNK-BP, is a Russian company where BP owns 50% while the other 50% is owned by a group of prominent Russian investors – Alfa Group, Access Industries and Renova (AAR).

For the next quarter, the company expects refining margins to be stronger than the reported quarter. Although the planned turnaround activities in 2012 are expected to be similar to the 2011 levels, the company expects the marketing environment in fuels, lubricants as well as petrochemicals to remain subdued based on the global demand.

To Conclude

Management remains positive on the company’s growth profile and looks forward to recovery as well as consolidation in order to reduce operational risk or oil spill-related assignments. BP remains focused on a string of upstream activities and we believe that its new strategy of active portfolio management, higher exploration activity with additional precautionary actions and refining and marketing repositioning will create value for shareholders.

While the GoM tragedy has affected BP’s share performance, we expect it to recover and hence, stick to our long-term Neutral recommendation. BP holds a Zacks #3 Rank (short-term ‘Hold’ rating).

BP’s major competitor, ExxonMobil Corp. (XOM) reported its fourth quarter earnings last week. Exxon’s earnings grew year over year but missed the Zacks Consensus Estimate.

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