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BP Bests Profit Expectations

BP plc last week reported better-than-expected profits in 3Q2012, a big turnaround from the previous quarter's losses.

Underlying 3Q2012 replacement cost profits, which strip out one-time costs, totaled $5.2 billion, 40% higher sequentially. The latest figures were lower than those of a year ago, when BP reported $5.5 billion in profits, but CEO Bob Dudley noted that since then the company has sold a significant number of assets in its portfolio. On the growing confidence in its earnings potential, the quarterly dividend was increased by 12.5%, which is expected to be paid in 4Q2012.

"BP's performance and the strong progress we are making in transforming the company give us the confidence to increase distributions to our shareholders," Dudley said during a conference call. "We are on track with our strategy to 2014 and are laying the right foundations for sustainable growth during the coming decade."

A year ago Dudley unveiled BP's plan to create value after a devastating year in which the producer attempted to right itself following the Macondo well blowout in the Gulf of Mexico (GOM) (see NGI, Oct. 31, 2011). At that time, Dudley said the company had achieved an "operational turning point." On Tuesday he said BP was well on its way to regaining its stature as a world-class operator.

"In the last two years we have fundamentally repositioned BP through an extensive change program in three main areas," he said. Safety and reliability were at the top of the list, followed by an upheaval of its portfolio. The third area, "upstream renewal," is paving the way for increased output over the next decade. "BP expects to generate future growth through increased investment in new upstream projects in higher-margin areas and through new access and exploration...BP's business portfolio is expected to become more tightly focused around its strong existing positions and its key operating strengths."

The oil major earlier in October achieved a long-sought goal: to sell its troubled half-interest in Russian explorer TNK-BP (see NGI, Oct. 29). However, the transaction to sell its interest to Russia's OAO Rosneft for $17.1 billion is helping to put BP on a path for future growth, Dudley said. "Rosneft is a great company with great opportunities. I believe our agreement will remove considerable uncertainty for our shareholders about BP's future in Russia and will secure for BP a valuable and truly distinctive position in one of the world's largest and most important oil and gas provinces."

In the latest quarter, upstream performance closely matched that of the previous three months as increased output from new projects and completion of turnarounds in the Gulf of Mexico was offset by seasonal maintenance overseas and in Alaska, as well as the impact of Hurricane Isaac. Operating cash flow in the quarter was $6.3 billion. At the end of September gearing was 20.9%, versus 21.9% at the end of June. Oil and gas production, excluding TNK-BP, was 2.26 million boe/d, "broadly" similar sequentially but 3% lower than a year ago. Output is expected to increase through December as maintenance season ends and new project ramp-ups continue.

As set out in its 10-point plan unveiled a year ago, BP expects to bring 15 major upstream projects into production by the end of 2014, 11 of which are in four higher-margin areas: the GOM, Angola, Azerbaijan and the North Sea. All of the projects are on track, said Dudley. As the company "moves beyond 2014," he said, BP expects to increase upstream investments in higher-margin areas and sustain the pace of new access and exploration.

Since early 2010 BP has accessed twice the new acreage it had accessed in the previous nine years, creating a much larger exploration prospect inventory," said the CEO. "This has also increased the company's exposure to new exploration areas outside areas of traditional focus; half of the prospect inventory is now in new plays and half in proven plays in known basins."

Nine exploration wells are slated to be completed this year, increasing to 15-25 exploration wells a year going forward, he said. Between now and 2015, BP's drilling program "is expected to test 15 new plays, in addition to deepening in existing core areas."

Since the end of June BP has announced agreements for divestments with a total value of more than $11 billion, including for the Texas City, TX, and Carson, CA, refineries and associated assets, as well as several nonstrategic deepwater fields in the GOM. "Since the start of 2010 BP has now announced disposals for a total of over $35 billion against its target of $38 billion," said Dudley, who noted that the total doesn't include the proposed Rosneft transaction for TNK-BP.

The "repositioning" of the company is expected to be "largely complete by the end of next year," which would provide "significantly more free cash flow."

However, don't expect BP to be prowling for acquisitions. "Now is not the right time to be in the acquisition hunt," Dudley told analysts. "We need to meet our obligations in the U.S., and we've just taken big steps in our portfolio. We are not in the hunt right now." The divestment program "is about fundamentally reshaping and repositioning our upstream portfolio. It gives BP a differentiated competitive position, which plays to our strengths in exploration, deepwater fields, giant fields and gas value chains. It is also biased to oil, which we believe has higher returns potential."

BP expects to make a final payment in 4Q2012 of $860 million into the $20 billion GOM trust fund for Macondo-related losses. At the end of September, the cash balances in the trust fund and the qualified settlement funds amounted to $10.9 billion, with $19.1 billion contributed and $8.2 billion paid out.

Dudley noted that District Judge Carl Barbier in New Orleans has scheduled a hearing on Thursday (Nov. 8) regarding a settlement BP reached with the Plaintiff's Steering Committee earlier this year (see NGI, March 12). The tentative settlement for $7.8 billion would resolve a "substantial majority of legitimate economic loss and medical claims." The first trial, if it were to proceed, is scheduled to begin Feb. 25 in New Orleans.

BP also updated investors on the status of legal proceedings related to the Macondo blowout. The U.S. Department of Justice (DOJ) has been conducting an investigation into the GOM oil spill regarding civil and criminal laws.

"BP is in ongoing discussions with the DOJ and other federal agencies regarding a possible settlement of these claims and whilst it is ready to settle on reasonable terms, a number of unresolved issues remain and there is significant uncertainty as to whether an agreement will ultimately be reached," the company said. "BP has repeatedly said that it is willing to settle on reasonable terms but otherwise continues to prepare vigorously" for trial.

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