BP Beats on Improved Prices - Analyst Blog

BP Plc (BP) reported third-quarter 2010 earnings of $1.73 per American Depositary Share (ADS), well above the Zacks Consensus Estimate of $1.51 and the year-earlier profit of $1.61. We have adjusted reported earnings for comparable periods for non-operating items.

The positive comparisons were driven by higher realized oil prices, lower depreciation and lower-than-usual tax rates.

The company's revenue jumped approximately 10% to $74,652 million from $67,856 million in the year-ago quarter.

BP is well on track with its $30 billion assets sale. The new chief executive said early last month that the company trying to reduce operatorships it holds in the Gulf of Mexico. He also hinted that BP is considering resumption of its dividend payment early next year.

All these positive initiatives have reflected in the company's share performance. BP ADSs rose more than 17% in the last two months.

Price Realization and Production

The company sold oil for $70.47 per barrel (versus $62.77 in the year-earlier quarter) and natural gas for $3.92 per thousand cubic feet (versus $2.81). Total production in the quarter was 3.76 MMBoe/d (million barrels of oil equivalent per day), down nearly 4.0% year over year.

Refining and Marketing (R&M) Performance

The R&M business segment posted a profit of $1.787 million, significantly above the year-ago figure of $916 million, driven by the improved operational performance in the fuels value chains, partly offset by weaker supply and trading contribution. International businesses contributed strongly to the results.

Refining margin climbed to 4.53 per barrel from $3.42 per barrel in the third quarter of 2009. Total refinery throughput increased about 4.3% year over year, while refining availability inched up to 95.0% from 94.3% in the third quarter of 2009.

For the fourth quarter of 2010, the company expects the usual seasonal decline in refining margins. Moreover, the supply and trading contribution is expected to remain weak in the fourth quarter due to continued lack of volatility in the market. BP's refinery turnaround activities are expected to be higher in the fourth quarter than in the third.

Capital Expenditure (Capex) and Asset Sale

BP's total capex in the reported quarter was $6.66 billion compared with $4.98 billion in the year-earlier quarter. The company's organic capex stood at $4.7 billion and its expectation for 2010 is around $18 billion. However, given the strength of cash flows, the company expects 2011 capital expenditure to exceed the previously announced $18 billion level.

During the third quarter, BP was well on track with its planned divestiture program of a number of non-strategic pipelines and terminals in the U.S. Mid-West, Gulf Coast and West Coast.

In September, BP wrapped up an agreement to sell its interests in ethylene and polyethylene production in Malaysia to its main partner, Petronas. The sale of the majority of these interests was completed in September, while the remaining portion was completed in October. Additionally, on October 1, BP and Delek completed the sale of the BP France retail business that was first announced in February 2010.

Balance Sheet

The company incurred $26.4 billion of net debt at the end of the third quarter compared with $26.3 billion incurred in the year-ago period. Net debt-to-capitalization ratio of 23% compared with 21% in the third quarter of 2009.

Asset divestitures, which will focus mainly on upstream assets, will help BP to reduce its net debt level to $10–$15 billion by the end of 2011.

Net cash used in operating activities in the quarter was $652 million compared with $8,099 million 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 appreciable. Despite BP incurring massive spill-related cost in the third quarter, the new CEO Bob Dudley was optimistic about the quarterly report.

Based on the third quarter performance and the company's efforts toward targeted $30 billion assets divestiture to meet the spill costs, we believe that the long-term fundamentals of BP remain strong.

We, thereby, retain our long-term Neutral recommendation on the company. BP holds a Zacks #3 Rank (short-term Hold rating).

 
BP PLC (BP): Free Stock Analysis Report
 
Zacks Investment Research