subject: BP Slips, As Expected [print this page] BP Plc (BP) announced a second-quarter 2010 loss of $5.48 per American Depositary Share (ADS), far below the Zacks Consensus Estimate of $1.44 and the year-earlier profit of $1.40. The loss was primarily due to a pre-tax charge of $32.2 billion related to the Gulf of Mexico (GoM) oil spill that the company had to register in the quarter.
However, the company's revenue increased approximately 34% to $75,871 million from $56,561 million in the year-ago quarter and surpassed the Zacks Consensus Estimate of $72,600 million.
The company also confirmed that CEO Tony Hayward will be replaced by Bob Dudley on Oct 1, 2010.
Price Realization and Production
The company sold oil for $72.90 per barrel (versus $52.33 in the year-earlier quarter) and natural gas for $3.76 per thousand cubic feet (versus $2.86). Total production for the quarter was 3.85 MMBoe/d (million barrels of oil equivalent per day), down 4% year over year.
Refining and Marketing (R&M) Performance
The Refining and Marketing (R&M) business segment announced a profit of $2,075 million, significantly above the year-ago figure of $680 million, driven by the improved operational performance in the fuels value chains, and continued solid margins in the international businesses, with both lubricants and petrochemicals showing a healthy performance.
Refining margin climbed to 5.49 per barrel from $4.98 per barrel in the second quarter of 2009. Total refinery throughput rose about 7.0% year over year, while refining availability inched up to 94.6% versus 93.6% in the second quarter of 2009.
For the third quarter of 2010, the company anticipates the usual seasonal decline in refining margins.
Dividend Suspended
The company suspended the first-quarter dividend that was slated for payment on June 21, 2010, and further decided that no interim ordinary share dividends will be paid for the second and third quarters of 2010. We think the suspension can enhance the company's financial flexibility required to overcome high cleanup costs and compensations in connection with the oil spill.
Capital Expenditure (Capex) and Asset Sale
BP's total capex in the reported quarter was $6.2 billion compared with $4.8 billion in the year-earlier quarter. The company's organic capex stood at $4.4 billion and its expectations for both 2010 and 2011 is around $18 billion.
The financially troubled U.K. major plans to dispose of $30 billion of assets over the next 18 months, including $7 billion worth of upstream assets to Apache Corporation (APA). The properties to be sold include the Permian basin assets worth $3.10 billion, Western Canadian gas assets of $3.25 billion and upstream assets of $0.65 billion in Egypt. The company also intends to sell its oil and gas fields in Vietnam and Pakistan for about $2$4 billion.
The company anticipates to pay the majority of the oil spill-related costs by the end of this year. Other costs that include fines and penalties, longer-term remediation, compensation and litigation costs, are likely to be stretched over a number of years.
Balance Sheet
The company incurred $23.2 billion of net debt at the end of the second quarter, down approximately 14% year over year, representing a net debt-to-capitalization ratio of 21% compared with 22% in the second quarter of 2009.
Asset divestitures, which will focus mainly on upstream assets, will help BP to reduce its net debt level to $10 billion$15 billion within the next 18 months.
Net cash provided by operating activities in the quarter was $6.8 billion, including a $2.1 billion cash outflow relating to the GoM oil spill, compared with $6.8 billion in the year-ago quarter.
Our Recommendation
The GoM oil spill tragedy has definitely ruptured the basic fundamentals of BP, but its constant endeavor to fight the related consequences is gaining traction. The company has already taken prudent steps to protect the interests of those residing in the affected region. The company is also considering the divesture of some of its assets in order to raise cash for paying off costs related to the Deepwater Horizon incident.
We thereby maintain our long-term Neutral recommendation for BP on the back of its industry-leading track record in terms of reserve replacement ratio and strong business fundamentals.
As the Macondo effect will continue for a long time, BP will have to incur huge costs in the years to come that are anticipated to further hurt the group's bottom line. In the near term, this issue will weigh heavily on the company's underlying valuation. Our short-term rating for BP is thus a Zacks #5 Rank (Strong Sell).
BP Slips, As Expected
By: Abhishek
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