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BP plc (BP - Analyst Report) reported third quarter earnings of $1.48 per American Depositary Share (ADS) on a replacement cost basis, excluding non-operating items, comfortably beating our expectation of $1.29, mainly attributable to increase in oil and gas output. However, the quarterly figure decreased 11.4% from the year-earlier adjusted profit level of $1.67. The company also announced a 12.5% hike in its dividend to 9 cents, payable in the fourth quarter of 2012.

BP’s total revenue decreased 4.7% year over year to $93.1 billion in the quarter. The decrease was mainly due to lower oil and U.S. gas prices.

Price Realization and Production

The company sold oil for $99.00 per barrel in the third quarter (versus $103.53 in the year-earlier quarter) and natural gas for $4.77 per thousand cubic feet (versus $4.95 in the year-earlier quarter). Natural gas prices in U.S. plummeted 27% on a year-over-year basis.

Total production of 2.259 MMBoe/d (million barrels of oil equivalent per day) was down 2.7% year over year, mainly due to field declines and divestments. However; major project start-ups, enhanced operation in Angola and higher output in other areas partly offset the downfall.

Owing to depressed price realizations, the Upstream segment experienced a 30.5% year-over-year decrease in profit.

Downstream

The Downstream segment posted a profit of $3 billion, up from the year-ago profit level of $1.7 billion. The quarterly result reflects the impact of robust performance in fuels business along with encouraging refining environment.

Refining Marker Margin increased to $19.50 per barrel from $12.51 in the third quarter of 2011. Total refinery throughput increased marginally to 2,512 thousand barrels per day (MB/d) from 2,430 MB/d in the year-earlier period. Refining availability inched down to 95.0% from 95.3% in the year-earlier quarter.

TNK-BP

The company announced a split in 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 increased 37.8% year over year on an underlying replacement cost basis. This was mainly due to positive foreign exchange impacts and the effect of the tax reference price lag on Russian export duties in the increasing price environment.

Segmental production scaled up 0.4% to 1,002 thousand Boe/d (MBoe/d) from the year-earlier quarter level of 998 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 $6.1 billion. Notably, almost all of the total capex ($5.9 billion) was organic.

BP is well on track with the planned $38 billion divestiture program of a number of its non-strategic assets through 2013. Disposal proceeds for the quarter were $1.4 billion with total disposals amounting in excess $35 billion since the announcement of the divestiture program in 2010.

Balance Sheet

BP’s net debt was $31.5 billion at the end of the third quarter compared with $25.8 billion a year ago. Net debt-to-capitalization ratio was 20.9% compared with 18.9% in the third quarter of 2011.

Net cash provided by operating activities was $6.3 billion versus $6.9 billion in the year-ago quarter.

Company Outlook

BP expects higher sequential production in the upcoming quarter following the completion of the summer maintenance season as well as for major project start-ups.

However, 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 due to usual seasonal movement as well as turnaround activity. The company’s petrochemicals margins are also expected to remain weak.

To Conclude

BP saw strong performance in both Upstream and Downstream segments in the quarter. The company’s strategy of offloading non-core upstream properties will prove beneficial over time, while creating a portfolio with potentially stronger growth from a smaller base. BP’s guidance of higher production for the upcoming quarter impresses us. Additionally, the effects of price movements have favorably impacted the company’s earnings in the quarter.

With the sale of its 50% interest in TNK-BP finalized last week, BP has made clear its future position in Russian activities. BP has sold its interest to state-controlled rival Rosneft for $17.1 billion cash and a 12.84% stake in Rosneft.

However, BP 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. Moreover, its far-reaching turnaround and maintenance ventures will continue into the upcoming quarter, further adding to the woes.

UK’s second largest oil company by market value after Royal Dutch Shell Plc (RDS.A - Analyst Report), is supported by a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. We maintain our Neutral recommendation on BP.
 

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