BP has now released their half year figures for 2013.
Overall operational revenues were down. Upstream revenues fell by $1.2B while lower margin downstream revenues increased by $416M. The effects of the sale of the stake in TNK-BP affects other income and we can see that earnings from associates were down by £1B, slightly mitigated by a small increase in earnings from joint ventures. The big difference from the first half of last year, however, is the $12.8B gain on business sales, up from $1.7B in the first half of last year as BP sold its stake in TBK-BP to Rosneft.
Purchases, production expenses and manufacturing expenses all fell reflecting the leaner organisation that BP is becoming but the main difference in expenses is the fact that impairment and losses on business sales were$4.2B less than in the first half of last year. Due to this increased (one-off) profit, tax was considerably higher and the profit for the half year ended up $14.7B higher at $19.1B. The difference can be entirely accounted for with the increase in business sales and the reduction on impairments on said sales. Otherwise, profits would be slightly down. Currency translation differences and cash flow hedges to market took their toll on total income, mitigated somewhat by a favourable remeasurement on the pension.
Overall total assets were up by $6.8B. The largest difference in assets can be explained by the sale of the TNK-BP business. At the end of the half year there were no assets held for sale compared to $19.3B at the end of 2012. This is split into $8.7B more cash and $11.9B more investments in associates, representing the Rosneft shares BP received as part of the deal. Other large changes were $3B increases in property, plant and equipment; a $4.8B increase in trade and receivables and a $482M increase in prepayments counteracted by large decreases in derivative financial assets which I think was related to an old share price being used to value the Rosneft shares.
Liabilities fell during the half year driven by a $1.8B fall in debt, a $3.7B reduction in provisions as $3.9B relating to the agreement with the US government to resolve all criminal claims relating to the Gulf Region Health Outreach Program were reclassified as payables, and a $2.6B reduction in pension obligations. These were somewhat mitigated by $1.2B increase in trade and payables, a $2.2B increase in tax liabilities and a $2.5B increase in other payables (partially due to the reclassification of the provision mentioned above). All of this gives a net tangible asset base of $92.8B, a pleasing $9.9B up on the end of last year, albeit mostly driven by the disposal of TNK-BP.
At $19.7B operating cash flows for the half year were $3.4B higher than at the same period of last year. This was eroded by movements in Gulf of Mexico spill cash flows, movements in working capital and tax so that the net cash from operations, at $9.4B was $1.5B up on the first half of 2012. Once again, this was not enough to cover capital expenditure during the period, which was $1.5B higher at $11.8B, most of which went on upstream operations. The sale of businesses and assets added $21.1B to the cash flow, $4.9B of which was spent on investments in associates, mainly Rosneft. The change in debt was fairly neutral, with repayments being pretty much the same as new loans. As mentioned previously, BP has begun a share buy-back scheme, which accounted for $1.8B of cash and $3.1B was paid out in dividends.
The upshot of all this was a $8.7B positive cash flow, up by $7.8B from the first half of last year. It is fairly hard to get at underlying figures here as it is not clear what investments BP would have made had they not sold the massive stake in TNK-BP, but it is clear that operating cash flows were not enough to cover capital expenditure, let alone dividends so this needs to improve in future.
Although most revenues were made in the downstream sector, profits were highest in Upstream. Replacement cost profit of upstream operations was $10B, $66M higher than in the first half of last year. Downstream operations were $3.5B up on the loss that occurred last year due to a $2.7B impairment charge, and were $2.7B during the period. TNK-BP made a one off $12.5B profit and the first lot of Rosneft profits occurred ($303B). Other business made a loss of $1B, improved slightly from the $1.2B loss in the first half of 2012.
Underlying profit in the Upstream segment was $10B, £700M less than in the first half of last year. These figures were adversely affected by lower liquid realisations, higher costs, exploration write-offs and lower production due to divestments somewhat mitigated by higher gas realisations. Underlying production actually increased reflecting new project volumes in Angola, The North Sea, the Gulf of Mexico and an improved performance in Trinidad. Actual production was lower, however, due to divestments. Looking ahead, the group expects Q3 production to be lower as a result of planned turnaround activity and repairs in the North Sea, planned maintenance in Alaska and further divestments. Costs are also expected to be seasonally higher in Q3.
The sale of BP’s 60% interest in the Polvo oil field in Brazil for $135M is expected to be completed next quarter and some good news from Brazil was that BP, along with some partners, was named as winning bidders for eight offshore blocks, two of which will be operated by BP. Other positive news was that a significant gas concentrate discovery was made off the Eastern Coast of India. Also, BP was awarded interests in two licences in the Barents Sea off Norway. The group also announced $1B of new investment and two drilling rigs at the Alaska North slope field over the next five years. Additionally, the group announced the start-up of oil production from new facilities at Valhall near Norway and the completion of a successful flow test at a well on offshore Brazil but the decision was made not to proceed with the current plan for the Mad Dog Phase 2 project in the Gulf of Mexico, which was disappointing.
Underlying profit in the downstream sector was $2.8B, an increase of $782M on the first half of last year. The fuels business provided an underlying profit of $2.1B and accounted for most of the profits in this segment. This was a $815M increase on the same period last year which was mainly due to a strong supply from operations despite a planned outage for maintenance at the Whiting refinery and further divestments. The second quarter marked the start-up of the new crude unit at the Whiting refinery which is on target to be completed in the second half of the year. Additionally, BP-Husky Refining successfully started up a new Naphtha reformer at the Toledo refinery and the Cherry Point refinery commissioned its new diesel dydrotreater and Hydrogen plant. An investment of $500M was announced for Southern African refining projects. During the half year both the Carson refinery and the Texas City refinery were sold in the US.
Going forward, the group expects refining margins to decline due to global capacity additions and the absence of profits from the two sold refineries, which contributed well to the results in the same quarter of last year (shame they were sold then…). The lubricants business had an underlying profit of $717M in the first half of the year, an increase of $72M on the same period of last year driven by increases of sales from the premium Castrol brands and strong profitability from growth markets. The Petrochemical business only managed underlying pre-tax profits of $35M in the first half of the year, which was a decline of $105M on the first half of 2012. This was blamed on a difficult trading environment and margins are expected to remain under pressure for the rest of the year. In June, however, BP and its partner received final approvals from the Chinese government for a third purified terephthalic acid plant at Zhuhai.
Underlying profits from the new Rosneft investment were $303M during the period, although there were only 11 days of contribution from the first quarter so this will improve going forward. Other Business made an underlying loss of $899M during the period, a $76M improvement on the same period of last year. During the year BP decided to retain and continue its wind business despite taking an impairment hit of $141M. The main news seems to be the start-up of the Vivergo joint venture bioethanol plant in the UK.
The aftermath of the Gulf of Mexico oil spill still looms large over the results for BP. Overall another $241M was paid on the Gulf spill response compared to $823M in the same period of last year. This charge was due to an increase in the litigation and claims provision and the ongoing costs of the Gulf Coast Restoration Organisation. To date, the total cost now stands at $42.4B. The ultimate cost that will be paid is still open to a great deal of uncertainty. Another issue is that money in the $20B trust fund is running out and the board predict that in the next quarter it will completely run out and that any payments made will have to come straight from the income statement which will obviously have an effect on cash flows. Of the provisions, there is still $11.2B on the book, mostly relating to litigation and claims, with smaller amounts in Clean Water Act penalties and Environmental penalties, not including the substantial penalties that BP cannot currently estimate. The PSC settlement for business claims has increased to $9.6B but even if BP is successful in their challenge to the PSC’s interpretation of the claims the figure will end up being higher.
The Clean Water penalties are based on the assumption that BP will not be found guilty of gross negligence or wilful misconduct and the amount eventually paid is also open to considerable uncertainty. The trial is scheduled to start at the end of September. Since the last update, BP has now been named as a defendant in more than 2,200 additional civil lawsuits brought by individuals, corporations and government entities and further actions are likely to emerge. The vast majority of these claims have been filed under the Oil Pollution Act. No provision has been added for these as the outcome cannot be predicted but BP has applied to have these claims consolidated with the MDL 2179 cases mentioned above where it is being decided whether BP is grossly negligent or not. As mentioned in the last update, possibly the potentially most damaging claims are being made by the states of Alabama, Mississippi, Louisiana and Florida and those civil claims have been consolidated with the MDL 2179.
Not much progress has been made to try and overturn the decision to suspend BP’s participation in new US government contracts. On 19th July the EPA upheld this decision. Apparently this can be challenged in a federal court but there is no indication as to whether this is a course BP is going to take. With regards to the Plaintiffs Steering Committee settlements, as mentioned in past updates, BP has been challenging the fact that the DHCSSP seems to be accepting claims without merit as they are interpreting the agreement in a different way to BP. In March, the court upheld the claims administrator’s interpretation of the ruling. BP is continuing to appeal the decision but it looks as though this might end up costing more than BP initially thought… As far as I can tell, the cases that shareholders have filed against BP for loss of earnings and dividends have been dismissed.
The Gulf spill, as well as causing BP a huge amount of financial woe is probably also having an effect on their ability to obtain more contracts, particularly in the US where they have suffered a huge amount of damage to their reputation which my take many years to clear. As if this wasn’t enough, European Commission officials made a series of inspections at the BP offices (and other companies in the industry) acting on concerns that anti-competitive behaviour might have taken place regarding oil price reporting. The investigation is still at an early stage but it has prompted similar requests from US authorities worryingly.
The other defining occurrence this half was the sale of BP’s stake in TNK-BP to Rosneft and the subsequent allocation of some Rosneft shares to BP. $16.6B was received in cash and $10.8B was received in Rosneft shares which was offset against the carrying value of the investment in TNK-BP of $12.4B. Nearly $3B of these receipts were deferred. Other investments held for sale that were completed during the period was the sale of the Maclure, Harding and Devenick fields in Braemar in the North Sea; the sale of the Carson refinery in California and the sale of the Texas City refinery.
The huge $19.1B profit that was recorded was mainly due to the sale of the TNK-BP stake. The group also benefited from a lack of impairments on sales of businesses. Net tangible assets also benefited from the sale as these were up nearly $10B. The reduction in the pension deficit and an increase in receivables also helped here. Cash from operations was up on the first half of last year but remained insufficient to cover the capital expenditure. The cash flow was positive by the tune of $8.7B, however, due again to the proceeds from the TNK-BP sale. Underlying profits were actually up as a whole but profits in the upstream business fared worse than last year. The best performer was the fuels business, up by $815M.
Going forward, it is of some concern that the board expect profits to be lower next quarter than in the same period of last year. Results are also still being overshadowed by the aftermath of the Gulf of Mexico spill. There is still a huge amount of uncertainty regarding how much more that BP will pay but there are still some substantial charges waiting in the wings and the fact that the trust fund has run out of money does not bode well for the second half of the year. Net debt at the end of the period was $9.2B better off at $18.2B as the group used the proceeds from the disposals to reduce debt and at current prices the shares have a dividend yield of 5.3%, which is pretty decent and brokers are still predicting a forward P/E of 8.9 which is very cheap even given the uncertainty surrounding the Gulf Spill. Until more is known about the final charges that will be incurred, however, I feel these are still a bit risky to buy more of so I remain a holder.
On 3rd October it was announced that the US Court of Appeals, Fifth Circuit ruled in favour of BP in that the claims administrator should not be automatically paying out claims to people who did not suffer actual injury traceable to loss from the Deepwater Horizon accident until the matter is fully heard and decided through the judicial process. The matter is now remanded for further proceedings to the District Court. It is gratifying to see that at least someone in the US legal systems seems to be seeing sense and this ruling is pleasing. It should be kept in mind, however, that this is far from over and in the past he US courts have had a history of coming down against BP so I will not be celebrating quite yet.