BP plc, which today is a much smaller operator than it was a year ago, on Tuesday smashed analyst expectations by about $1 billion on average, boosted by high margin projects and better-than-expected profits from trading.
Underlying replacement cost profits, which strip out one-time gains/losses, were $4.2 billion ($1.32/share) in 1Q2013, 10% lower than the $4.7 billion ($1.47) earned a year ago, but higher than the $3.9 billion earned in 4Q2012.
The latest results handily topped consensus estimates of $3.27 billion on some difficult-to-predict factors, including capital costs, trading operations and profit margins in new fields.
“The drivers in our first quarter earnings were a better margin mix, better costs, and oil and natural gas trading,” Group CEO Bob Dudley told investors during a two-hour-plus conference call from London. “Longer term, our direction is very clear. We will be a focused oil and gas company, with a bias toward liquids…and we will do this through safe and reliable operations and disciplined capital investment.”
CFO Brian Gilvary, who shared a microphone with Dudley, attributed the strong trading results to global liquefied natural gas (LNG) and oil sales. “Historically, we don’t talk about the trading numbers,” Gilvary said. BP typically compares its trading results on an average quarterly basis. “Compared to the average quarter, the trading results were about $500 million higher than an average quarter” over the past five years, split between upstream, or natural gas, and the downstream.
In 2008 and 2009, BP’s trading results were “strong,” then they began to move south. By 2011, trading had become a “tough” row to hoe. Today. however, “Henry Hub has come back and it’s moving on a forward trajectory for 2014…Oil is trading high…Our projection of $30-31 billion in operating cash flow for 2014 is well underpinned…”
Gas trading surged on improved output from the Tangguh LNG project in Indonesia, coupled with strong pricing in Asia. BP also was able to maximize its refinery availability by more than 95%, which improved refinery margins, particularly in the U.S. Midwest. Gains also came on new field ramp-ups in high margin areas.
In the latest quarter BP completed a $27.5 billion transaction with OAO Rosneft, giving it a 19.75% stake in the Russian producer in exchange for its stakes in TNK-BP (see Daily GPI, Oct. 23, 2012). The gain on the TNK-BP sale was $15.5 billion. The 11 days of earnings in March from Rosneft after the transaction was completed were estimated at $85 million. Mostly on the transaction, net debt at the end of March fell to $17.7 billion from more than $31 billion at the end of 2012.
Reported production was 2.33 million boe/d in 1Q2013, about 2% more sequentially than in the final period of 2012, but including sales, output was down 5% from a year ago. Including the Rosneft stake, total output today is more than 3 million boe/d.
Operating cash flow totaled $4 billion in 1Q2013 versus $3.4 billion a year earlier, which indicates that the company is on track to meet a key performance goal: increase cash flow to $30-31 billion in 2014, which would be 50% more than in 2011, said Dudley.
BP is “currently testing a reloaded portfolio,” and it may take some months to see how the results play out, he said. The company has sold more than $38 billion of its global portfolio since the Macondo well blowout in April 2010. About $5 billion more properties are to be marketed this year.
Between 15 and 25 exploration wells are set to be drilled by the end of the year. “Up to now we’ve been drilling ‘obligation’ wells, but now we are getting into new acreage that we’ve picked up…We have eight wells testing about several new plays in Brazil, Egypt, Jordan…wells in the UK, Indonesia, India, and a well in the Gulf of Mexico.”
Capital spending for 2013 is set at $24-27 billion, with higher outlays planned through the rest of the decade. Final investment decisions (FID) are planned for “as many as five projects this year, compared to three last year…Three could be mega projects, and there could be even more if we decide…In light of our approach to capital discipline, we will look at any FIDs that need to be refined, but we expect to see five this year and more than five in 2014.”
The GOM remains the go-to U.S. region, with seven rigs now operating in the deepwater, and an eighth rig to be added before the end of the year — more than any other operator. Three big operated projects are at various stages: Galapagos, Na Kika Phase 3 and Mad Dog Phase 2.
Mad Dog Phase 2, a deepwater truss spar project that would be capable of producing 120,000-140,000 boe/d, was delayed, not canceled, two weeks ago on cost concerns (see Daily GPI, April 22). However, it “really is a world-class resource, and we intend to develop it with our partners” BHP Billiton and Chevron Corp., said Dudley. The margins just weren’t there under the current plan, he said.
BP’s profitable wind power business also wasn’t a fit with an oil and gas-driven model, and it has been put up for sale (see Daily GPI, April 4). “Wind is a very viable business; it’s a good business,” said Gilvary. “It just simply doesn’t fit the portfolio going forward, which is why we chose to exit…When we take it to market, we believe it will be competitively bid.”
Meanwhile, the first phase of the multi-district litigation (MDL) 2179 civil trial in New Orleans regarding the Macondo blowout was completed April 17 (see Daily GPI, March 6, 2012). A second phase of the trial, to address source control issues and the quantity of oil released, is scheduled to begin in September.
“While the final decision rests with the court, BP believes the evidence and testimony presented at trial confirms that it was not grossly negligent and that the accident was the result of multiple causes, involving multiple parties,” Dudley said. At the end of March, the total net cumulative charge for the spill remained at $42.2 billion.
Since March 6, BP has been named a defendant in more than 2,200 additional civil lawsuits brought in U.S. courts, the company disclosed. The lawsuits were filed ahead of the third anniversary of Macondo, April 20, 2013, because claims after that date may be subject to time challenges by BP. The company plans to attempt to consolidate the new lawsuits within the MDL trials in New Orleans.
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