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British energy behemoth BP Plc’s (
- Analyst Report
second quarter 2012 adjusted profit suffered from widespread planned maintenance activities (particularly in the high-margin area of the Gulf of Mexico/GoM), lower contribution from its Russian partner TNK-BP, as well as weaker oil and U.S. gas prices.
BP reported quarterly earnings of 7 cents per American Depositary Share (ADS) on a replacement cost basis, excluding non-operating items, plummeting 96% from the year-earlier adjusted profit level of $1.72. The quarterly figure was nowhere our expectation of $1.45.
BP’s total revenue decreased 8.7% year over year to $94.9 billion in the quarter, but surpassed the Zacks Consensus Estimate of $91.7 billion.
Price Realization and Production
The company sold oil for $100.89 per barrel in the second quarter (versus $106.99 in the year-earlier quarter) and natural gas for $4.54 per thousand cubic feet (flat year over year). However, natural gas prices in U.S. plummeted 47% from the year-earlier levels.
Total production of 2.275 MMBoe/d (million barrels of oil equivalent per day) was down 7.4% year over year. The underperformance was mainly due to planned downtime activities in the higher-margin area of the GoM as well as in Trinidad. However, production in India and major project start-ups in Angola and Trinidad partly offset the downfall.
Owing to depressed price realizations and lower production volume, the Upstream segment experienced a 30.5% year-over-year decrease in profit.
The Downstream segment posted a profit of $1.1 billion, down from the year-ago profit level of $1.4 billion. The quarterly result reflects the effect of lower contributions from lubricants and petrochemicals operations.
However, refining Marker Margin increased to $15.84 per barrel from $13.92 in the second quarter of 2011. Total refinery throughput increased marginally to 2,282 thousand barrels per day (MB/d) from 2,253 MB/d in the year-earlier period. Refining availability decreased to 94.5% from 94.8% in the year-earlier quarter.
The company separated its Exploration and Production segment to form two new operating segments, Upstream and TNK-BP, with effect from January 1, 2012. The segment’s net income decreased 58.2% year over year on an underlying replacement cost basis. This was mainly due to lower realizations.
Segmental production climbed 4.1% to 1,016 thousand Boe/d (MBoe/d) from the year-earlier quarter level of 976 MBoe/d, largely attributable to the enhancement of recent new developments.
Capital Expenditure (Capex) and Asset Sale
In the reported quarter, BP’s total capex was $5.4 billion as against $8.2 billion in the year-earlier quarter. Notably, almost all of the total capex ($5.3 billion) was organic.
BP is well on track with the planned $38 billion divestiture program of a number of its non-strategic assets over the period of 2010–2013. Disposal proceeds for the quarter were $1.9 billion with total disposals amounting to $24 billion since the announcement of the divestiture program in 2010.
BP’s net debt was $31.7 billion at the end of the second quarter compared with $27.0 billion a year ago. Net debt-to-capitalization ratio was 21.9% compared with 19.9% in the second quarter of 2011.
Net cash provided by operating activities was $4.4 billion versus $7.8 billion in the year-ago quarter.
BP expects lower sequential production in the upcoming quarter due to normal seasonal turnaround activity, particularly in high-margin regions in the UK North Sea.
However, BP foresees its production level to experience a boost in the fourth quarter following the completion of the summer maintenance season as well as for major project start-ups. Full-year production level is again expected to be lower than 2011 due to the impact of divestitures.
For the next quarter, the company expects refining margins to experience a downfall in its fuel business for usual seasonal movement as well as turnaround activity. The company’s petrochemicals margins are also expected to remain weak.
BP saw lackluster performance in both Upstream and Downstream segments in the quarter. The Gulf of Mexico drilling moratorium of 2010 is still hurting BP’s production and the company’s guidance of lower production for the upcoming quarter also keeps us wary.
BP also projected a lower production level for the year compared to 2011. The GoM spill in 2010 and the failed Russian Arctic deal have undoubtedly weighed on BP shares. Additionally, the effects of price movements have adversely impacted the company’s earnings in the quarter. Moreover, its far-reaching turnaround and maintenance ventures will continue into the upcoming quarter, adding significant headwind.
Hence, we remain bearish on UK’s second largest oil company by market value following Royal Dutch Shell Plc ( RDS.A - Analyst Report ) . Our Underperform recommendation on BP is supported by a Zacks #4 Rank, which is equivalent to a Sell rating for a period of one to three months.
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