BP Plc (BP) has reported second-quarter 2011 earnings of $1.76 per American Depositary Share (ADS) – on a replacement cost basis, excluding non-operating items – well below the Zacks Consensus Estimate of $1.97. The underperformance resulted mainly from lower production volumes (including the impact of divestments) and higher costs (including rig standby costs in the Gulf of Mexico/GoM), which were partly balanced by higher oil and gas price realizations.
However, quarterly results were higher than the year-earlier adjusted profit level of $1.57. BP’s revenue registered an impressive 37% improvement to $103,848 million in the quarter, handily beating the Zacks Consensus Estimate of $97,208 million.
Price Realization and Production
The company sold oil for $106.99 per barrel (versus $72.90 in the year-earlier quarter) and natural gas for $4.54 per thousand cubic feet (versus $3.76). Total production in the quarter was 3.43 MMBoe/d (million barrels of oil equivalent per day), down almost 11% year over year. However, the upstream segment registered a 6% year-over-year growth in profit, mainly on account of steeper oil and gas prices.
The volume loss was mainly due to the asset sale program that BP undertook to cover costs related to the GoM disaster. Higher maintenance costs in the North Sea and Angola, as well as lower production in the GoM were also responsible for the decline. However, these negatives were partially mitigated by production in Iraq.
Refining and Marketing (R&M) Performance
The R&M business segment posted a profit of $1,338 million, compared with $2,075 million in the year-ago quarter. The quarterly result reflects loss in supply and trading, reduced economic utilization at the Texas City refinery following the recent weather-related power outage, higher turnaround activities, and certain one-off charges, which were partly offset by an improved refining environment.
Refining Marker Margin increased to $13.92 per barrel from $11.04 per barrel in the second quarter of 2010. Total refinery throughput fell more than 7% year over year, while refining availability increased to 94.8% from 94.6% in the year-earlier quarter.
Capital Expenditure (Capex) and Asset Sale
In the reported quarter, BP’s total capex was $8,194 million as against $6,212 million in the year-earlier quarter. Notably, of the total capex, $4,200 million was organic.
BP is 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 $1.6 billion in the quarter. As of June 30, 2011, the company had entered into agreements for disposals for a total value of $25 billion. BP’s objective from the divestiture initiative is $30 billion by the end of 2011.
Balance Sheet
The company’s net debt was $26,968 million at the end of the second quarter compared with $23,217 million a year ago. Net debt-to-capitalization ratio was 20% compared with 21% in the second quarter of 2010.
Net cash provided by operating activities during the reported quarter was $7,848 million versus $6,753 million in the year-ago quarter.
Company Outlook
BP expects 2011 production to be in line with its prior forecast of around 3.4 million barrels of oil equivalent per day, with the exact outcome depending on the timing of acquisitions and divestments as well as production-sharing agreements (PSA) entitlement impacts.
For the upcoming quarter, the company expects refining margins to experience a typical seasonal decline. Again, BP expects its Texas City refinery to return to full capacity during August.
The company also expects its petrochemicals production volumes to improve sequentially following the recent full recovery of operations at Decatur, Texas City and Cooper River petrochemicals sites. The planned turnaround activity in the second half of 2011 is expected to be lower than the first half.
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.
We see a slow but gradual economic recovery, focus on upstream exposures through the trimming of downstream operations and increases in oil prices as favorable for BP.
However, the company expects operational interruption in the GoM, the ensuing acquisitions and divestments, as well as seasonal ramp-up in turnaround activity to be reflected in the third quarter production.
While the GoM tragedy has affected BP’s share performance, we expect the company 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 second quarter earnings later this week.
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