BP Plc (BP) reported first-quarter 2011 earnings of $1.69 per American Depositary Share (ADS), well below the Zacks Consensus Estimate of $1.80. The quarterly result was also lower than the year-earlier profit level of $1.78. We have adjusted earnings for non-operating items for the comparable periods.
The company realized higher oil and gas prices and lower depreciation in the quarter. However, weaker production, increased spill-associated costs and a lower contribution from gas marketing and trading hammered BP’s earnings.
The company’s revenue increased approximately 19% to $88,312 million from $74,417 million in the year-ago quarter.
Price Realization and Production
The company sold oil for $93.93 per barrel (versus $71.86 in the year-earlier quarter) and natural gas for $4.21 per thousand cubic feet (versus $4.26). Total production in the quarter was 3.58 MMBoe/d (million barrels of oil equivalent per day), down almost 11% year over year. Steeper oil and gas prices could not compensate for the decline in output.
The production loss was mainly due to the asset sale program that BP undertook to cover costs related to the Gulf of Mexico (GoM) disaster. Higher maintenance costs in the North Sea and Angola, and an operational disruption in the Trans-Alaska oil pipeline were also responsible for the decline.
Refining and Marketing (R&M) Performance
The R&M business segment posted a profit of $2,079 million, compared with $729 million in the year-ago quarter, driven by improved operational performance in fuels value chains, continued strong operational performance in international businesses and cost efficiencies.
Notably, solid operational performance in petrochemicals facilitated the company to benefit from the favorable margin environment and lubricants overseas.
Refining Marker Margin climbed to $11.02 per barrel from $9.06 per barrel in the first quarter of 2010. Total refinery throughput increased more than 6% year over year, while refining availability dropped to 93.9% from 95.3% in the year-earlier quarter.
For the upcoming quarter, the company expects refining margins to benefit from usual seasonal development, but foresees some softening in petrochemicals margins. Further, BP expects its refinery turnaround activities to be similar to that of the reported quarter.
Capital Expenditure (Capex) and Asset Sale
In the reported quarter, BP’s total capex was $4,021 million as against $4,687 million in the year-earlier quarter. Notably, all of this was organic capex.
During the first quarter, BP was well on track with its planned divestiture of a number of non-strategic assets, expected to be completed by this year end. Disposal proceeds were $1.0 billion in the quarter. Last year, BP had to take a $40.9 billion pre-tax charge in 2010 related to the spill.
Balance Sheet
The company’s net debt was $27,506 million at the end of the first quarter compared with $25,160 million in the year-ago period. Net debt-to-capitalization ratio was 21% compared with 19% in the first quarter of 2010.
Net cash used in operating activities during the reported quarter was $2,404 million versus $7,693 million in the year-ago quarter.
BP-Rosneft Deal
In mid-January 2011, BP and Russia’s state-operated oil company, Rosneft entered into a share-swap agreement to jointly explore and develop three offshore licenses in the prospective Siberian Artic region. Under the agreement, the U.K. oil major offered 5% of its ordinary shares, valued at $7.8 billion, in exchange for 9.5% of Rosneft’s shares.
Following a temporary injunction held by its Russian partner, TNK-BP, the British oil giant has agreed with Rosneft to extend the closing date for completion of the deal until May 16, 2011.
In the wake of growing global oil demand, we see the UK oil major as benefiting from the long-term, strategic alliance with the world’s largest hydrocarbon-producing nation.
To Conclude
Management remains positive on the company’s growth profile and looks forward to a recovery as well as consolidation in order to reduce operational risk or oil spill related assignments.
We see a slow but gradual economic recovery, an increasing focus on upstream exposures through the trimming of downstream operations and increases in oil prices as favorable for BP.
However, the company expects the operational interruption in the GoM, the ensuing acquisitions and divestments, as well as seasonal ramp-up in turnaround activity to be reflected in the second quarter production.
While the GoM tragedy has affected BP’s share performance, we expect the company to come out of the tight spot 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), Exxon Mobil Corp. (XOM), and Chevron Corp. (CVX) are scheduled to report their first quarter earnings later this week.
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