November 1, 2011
BMI View: BP's Q311 earnings were broadly in line with market expectations, but the announcement of an increase in asset divestments will allow it to fill the oil spill trust fund a year ahead of schedule, which should boost the company's cash flow.
UK major BP announced its Q311 financial results on October 25 2011. BP reported a replacement cost profit of US$5.14bn, down from US$5.31bn in the previous quarter. The figure was, nonetheless, a significant year-on-year (y-o-y) improvement on earnings of US$1.85bn in Q310. BP maintained its USc7/share dividend payment, which will be disbursed on December 19.
BP's lower quarter-on-quarter (q-o-q) profit figure was widely expected, as the company said in its Q211 earnings statement that production was likely to be lower in Q3. This was indeed the case. BP reported net output of 3.32mn barrels of oil equivalent per day (boe/d) in Q311, down about 3.3% from 3.43mn boe/d in the previous quarter. The Q311 production figure marks the fourth straight quarter of declining output, which BP attributed to lower US Gulf of Mexico (GoM) production drilling and the impact of turnaround and maintenance activity. In 9M11, production was 11% lower than in 9M10.
BP did, however, lift investor spirits by announcing that it intends to complete payments into its US$20bn oil spill trust fund a year ahead of schedule, by end-2012. In order to build up sufficient cash to do so, BP has announced that it is increasing the size of its asset divestment programme, from US$30bn to US$45bn, with additional sell-offs to include some of the company's US downstream assets. BP's cash position improved earlier this month, when it managed to secure a US$4bn payment from Anadarko Petroleum - a minority stakeholder in the Macondo project. This added to the US$1.1bn BP received from fellow Macondo stakeholder Mitsui Oil Exploration (MOEX).
At end-September 2011, BP had nearly US$18bn in cash (excluding the Anadarko payment) in addition to US$8.7bn worth of assets held for sale. Thus far, about US$9.9bn has been paid into the trust fund, with US$6bn disbursed to claimants. By accelerating the trust fund payment schedule and bringing projects currently in development onstream, BP is hoping to boost cash flow by about 50% by 2014, allowing it to raise dividend payments and enact a share buyback scheme to boost its flagging share price.
BP has struggled to calm investors who are anxious about the company's future. The collapse of its Arctic exploration deal with Russia's Rosneft earlier this year has left investors demanding a revamp of its strategic direction. Instead of pushing for yet another high-profile deal, BP is addressing its financial health head-on, in preparation for the start of Macondo-related legal proceedings in early 2012. This signals that the company's management is broadly satisfied with the growth prospects of BP's current slate of projects. By 2014, BP expects to have brought onstream 17 new projects. The company has made final investment decisions on liquids-focused projects set to cumulatively deliver additional gross output of 1.92mn boe/d - output sorely needed to revive BP's fortunes.
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