BP Plc (BP) has reported third-quarter 2011 earnings of $1.67 per American Depositary Share (ADS) on a replacement cost basis, excluding non-operating items. Results were below the Zacks Consensus Estimate of $1.68 and lower than the year-earlier adjusted profit level of $1.74. The underperformance resulted from lower production volumes, primarily in the Gulf of Mexico (GoM) region as well as associated costs related to rig standby in the region.
However, revenue soared 30.7% year over year to $97.6 billion in the quarter, handily beating the Zacks Consensus Estimate of $91.5 billion.
Price Realization and Production
The company sold oil for $103.53 per barrel (versus $70.47 in the year-earlier quarter) and natural gas for $4.95 per thousand cubic feet (versus $3.92). Total production in the quarter was 3.32 MMBoe/d (million barrels of oil equivalent per day), down almost 12% year over year. The Upstream segment also experienced a 9.7% 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. Management said the increased level of maintenance turnarounds had now come to an end.
Refining and Marketing (R&M) Performance
The R&M business segment posted a profit of $1.5 billion, compared with $1.8 billion in the year-ago quarter. The quarterly result reflects the effect of increased relative sweet crude prices in Europe and Australia, primarily due to the loss of Libyan production as well as adverse foreign exchange effects. However, these negatives were partially mitigated by the superior refining environment and stronger supply and trading contributions.
Refining Marker Margin increased to $12.51 per barrel from $10.00 per barrel in the third quarter of 2010. Total refinery throughput increased marginally to 2,430 thousand barrels per day (MB/d) from 2,429 MB/d in the year-earlier period. Refining availability increased to 95.3% from 95.0% in the year-earlier quarter.
Capital Expenditure (Capex) and Asset Sale
In the reported quarter, BP’s total capex was $11.7 billion as against $6.7 billion in the year-earlier quarter. Notably, of the total capex, $4.7 billion was organic. The expected full-year organic capex is around $19 billion.
BP is well on track with the planned divestiture of a number of its non-strategic assets. Disposal proceeds were $2.1 billion in the quarter. As of October 24, 2011, the company had entered into disposal agreements for a total value of $26 billion. BP’s objective from the divestiture initiative is $30 billion by the end of 2011.
The British oil giant expects to boost the pace of divestiture activities this year and intends to sell off additional $15 billion worth of non-strategic assets by the end of 2013. The latest program includes the previously announced disposals of the Texas City and Carson refineries and associated marketing interests.
Balance Sheet
The company’s net debt was $25.8 billion at the end of the third quarter compared with $26.4 billion a year ago. Net debt-to-capitalization ratio was 19% compared with 23% in the third quarter of 2010.
Net cash provided by operating activities was $6.9 billion versus net cash used by operating activities of $652 million in the year-ago quarter.
Company Outlook
BP expects fourth quarter production to be higher following the peak turnaround season. The Reliance deal is also expected to aid the fourth quarter performance. However, the company expects the slower pace of drilling activities in the GoM region as well as the asset sale program to adversely effect production for the upcoming quarter.
For the next quarter, the company expects refining margins to experience a typical seasonal decline. Although the planned turnaround activities are expected to be much below the third quarter level, Whiting refinery will undergo planned maintenance activity, affecting approximately half its crude capacity for the expected one month of outage.
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.
Starting this year through 2014, the company expects to bring 17 additional material upstream projects online. The cash margins per barrel on these projects are projected to be double the average of BP’s existing portfolio, significantly boosting cash flow.
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, Royal Dutch Shell plc (RDS.A), ExxonMobil Corp. (XOM) and Chevron Corp. (CVX) are scheduled to report their third quarter earnings later this week.
