BP Falls Short, Resumes Dividend - Analyst Blog

BP Plc (BP) reported fourth-quarter 2010 earnings of $1.39 per American Depositary Share (ADS), well below the Zacks Consensus Estimate of $1.63. The quarterly result was marginally below the year-earlier profit level of $1.40. We have adjusted earnings for non-operating items for the comparable periods.

Although the company realized higher oil and gas prices and lower depreciation in the quarter, the oil spill incident has hit hard the British oil giant.

The company's revenue increased approximately 14% to $83,988 million from $73,636 million in the year-ago quarter, and handily surpassed the Zacks Consensus Estimate of $65,017 million.

Importantly, the oil giant has resumed its quarterly dividend following its suspension after the Macondo well spill-over in the Gulf of Mexico in April 2010. The company will pay 7 cents per share (or $0.42 per ADS), equivalent to half the amount paid in the year-earlier quarter.

Notably, BP's major competitor, Royal Dutch Shell plc (RDS.A) is scheduled to report its fourth quarter earnings later this week.

Price Realization and Production

The company sold oil for $78.80 per barrel (versus $68.02 in the year-earlier quarter) and natural gas for $3.98 per thousand cubic feet (versus $3.68). Total production in the quarter was 3.67 MMBoe/d (million barrels of oil equivalent per day), down more than 9% on an annualized basis. Steeper oil and gas prices could not offset the decline in output.

Refining and Marketing (R&M) Performance

The R&M business segment posted a profit of $964 million, compared with a loss of $1,943 million in the year-ago quarter, driven by improved operational performance in fuels value chains, continued strong operational performance in international businesses and cost efficiencies.

Refining margin climbed to 4.64 per barrel from $1.49 per barrel in the fourth quarter of 2009. Total refinery throughput increased more than 5% year over year, while refining availability inched up to 94.9% from 94.4% in the year-earlier quarter.

For the first quarter of 2011, the company expects refining margins to remain similar to that of the reported quarter. However, the British oil giant remains optimistic on the petrochemical environment. Further, BP expects its refinery turnaround activities to perk up in the first quarter.

Capital Expenditure (Capex) and Asset Sale

In the reported quarter, BP's total capex was $5.46 billion as against $5.91 billion in the year-earlier quarter with its organic capex being $5.2 billion. For 2011, total capex is estimated at around $20 billion.

During the fourth quarter, BP was well on track with its planned divestiture program of a number of non-strategic assets. Disposal proceeds were $7.4 billion in the quarter and $17.0 billion in 2010. For 2011, the company plans to execute around $13 billion of further disposal proceeds.

Balance Sheet

The company incurred $25.9 billion of net debt at the end of the fourth quarter compared with $26.2 billion in the year-ago period. Net debt-to-capitalization ratio was 21% compared with 20% in the fourth quarter of 2009. The company intends to reduce its net debt ratio to a range of 10 – 20%.

Net cash used in operating activities was $178 million compared in the quarter with net cash provided by operating activities of $7,288 million in the year-ago quarter.

Our Recommendation

Management remains positive on the company's growth profile and looks forward to a marked recovery as well as consolidation in order to reduce operational risk or oil spill related assignments.

Additionally, the share-swap agreement between BP and Russia's state-operated oil company, Rosneft, enables the former to strengthen its position in the Russian hydrocarbon reserve, which was previously off limits to foreign companies. In the wake of rising global oil demand, we see the U.K. oil major as benefiting from this long-term, strategic alliance with the world's largest hydrocarbon-producing nation.

We see an anticipated slow and gradual economic recovery, an increasing focus on upstream exposures through the trimming of downstream operations and increases in oil prices as boding well for BP. Bob Dudley, the chief executive officer of the company commented that BP would sell two refineries in the U.S. and invest more in oil and gas production.

However, we continue to see near-term headwinds with respect to weak U.S. refining margins and competitive disadvantages versus its European peers. Further, the company depends on property acquisition to expand its resource base. We believe that the company lags in this space in some lucrative regions such as Brazil, West Africa and Asia-Pacific.

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

 
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