British energy behemoth
BP Plc
's (
BP
) 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.
Downstream
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.
TNK-BP
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.
Balance Sheet
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.
Company Outlook
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.
To Conclude
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
). 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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