BP has now released an update covering the first nine months of the year.
Revenues for the first nine months of the year were up compared to the same period of last year driven by a $5.753B increase in downstream revenues. By contrast upstream revenue decreased by $2.067B and earnings from associates fell by $1.611B. Other business revenues also fell slightly. The total revenues, however, were flattered by a $13.072B gain from the sale of businesses and assets. The main increase in costs was a $4.678B hike in purchases which was counteracted by a $3.96B fall in impairment losses on business sales due to the lack of sales of quite so many refineries, a $1.416 reduction in production and manufacturing expenses and a $529M slide in production taxes to give a profit before tax some $14.191B higher. A $1.232B increase in income tax, however, gave a profit for the nine months $12.959B up at $22.66B.
Overall total assets at the end of the third quarter were up by a substantial $10.923B. We can see the effect of the TNK sale as $19.315B of assets held for sale were converted into $12.213B of investments in associates and $9.864B extra cash (clearly there was another gain involved there too). Otherwise we also see Property, Plant and Equipment up by$4.822B; Trade and receivables up by$3.242B, inventories up by $1.186B and other intangible assets increase by $1.190B. Not all assets were up, however, as the value of derivative financial instruments fell by $2.341B and other investments were $1.034B lower.
Liabilities were fairly flat but did fall by $576M. The large increases were seen in deferred tax liabilities, up by $2.164B; trade payables, up by $1.636B; other payables, up by $2.512B and loans, which were $1.484B higher. By far the largest fall seen in liabilities was in provisions, which was down by $4.564B in the first nine months of the year due to $3.933B relating to the Gulf Region Health Outreach Programme being re-classified in other payables, $2.562B being paid by the trust fund, $390M being paid by BP, and $379M derecognised from provisions as they could no longer be accurately predicted. These movements were somewhat mitigated by a $1.888B increase in business economic loss provisions and higher claims administration costs, and a $407M increase in relation to the write-down of the value of inventories with the other major fall a pleasing $2.581B improvement in pension obligations. This all meant that net tangible assets were up by a very impressive $10.424 to $93.354.
Cash profits for the first nine months of the year were $1.111B higher than in the same period of last year at $28.526. This cash income was eroded by nearly $8B of adverse movements in working capital and $4.887B in income tax payments. This left the net cash from operations of $15.686B, which was $1.586B up from last year. Once again, however, capital expenditure was higher than net cash from operations at $17.722B ($1.559B more). After operations the big cash generators were the $17.743B of proceeds from the disposal of assets and the $3.879B in proceeds from the disposal of businesses minus the close to $5B that was invested into associates. Other areas where the group spent the proceeds were the purchase of their own shares, which cost $3.093 and the payment of dividends which came to $4.523B. On top of this the group for some reason decided that they needed to increase net borrowings by $2.849B which drove the cash income to heights of $9.864B which was $7.867B higher than last time. This cash flow is impressive on first sight but perhaps not so much when the huge proceeds from the sales of assets and businesses are taken into account, as the net operating income does not cover capital expenditure.
The issues relating to the Gulf of Mexico spill are still having an effect on the group and the third quarter gave a charge of $39M which put the total for the year to date at $280M and a total charge since the start of the disaster of $42.487B. The trust fund that was set up to pay for the spill is starting to dwindle and there is now only $695M left unaccounted for, after which BP will have to start paying for the claims from the income statement.
The legal claims and appeals are still ongoing but the court recently upheld an appeal from BP relating to the administrator’s interpretation of proper claims, the immediate upshot of this is that the court has ordered the administrator to temporarily suspend any payouts for claims that are not sufficiently supported. This has also had the consequence of BP de-recognising provisions for any claims that were agreed but not yet paid as they could not reliably estimate the cost to the group. At the end of this period, BP’s estimate for the cost of the PSC settlement for individual and business claims was $9.2B, which is $400M less than at the end of last quarter but $1.4B more than at the end of last year. The final cost is likely to me much higher due to the fact that not all claims have yet been received and even in the last quarter, eligibility notices have been issued for claims totalling $650M.
The trial to ascertain whether BP’s actions consist of Gross Negligence is still ongoing, along with the court case to determine the volume of oil that spilled into the Gulf. This is a very important case as if BP is considered to be grossly negligent then they could be facing huge charges. Another ongoing case involves the efforts of BP to overturn Texas’ decision to suspend and debar BP from any future government contracts, of which there was no news. As reported previously at the end of last year the court gave a final judgement on class action settlement relating to the PSC settlements. Of the seven groups affected, five have appealed the decision with the appeals being heard in November. In addition, one group filed an appeal with regards to the Medical Benefits Class Action.
After an investigation it was found that the conduct of two attourneys involved with the DHCSSP claims may have violated federal criminal status regarding fraud, money laundering, conspiracy or perjury. A motion by BP to suspend all payments from the DHCSSP until such a time that improved anti-fraud controls are implemented is under consideration. As well as the claims from people directly affected by the disaster, BP is also fighting claims from Pension funds and shareholders with regards to the loss of value in their investments in the group. It has been decided that jurisdiction for most of these claims (with the exception of federal law claims based on the purchase of ASDs and a potential claim under Ohio law by certain Ohio funds) lies in UK courts. There is also another claim originating from Canada on behalf of a group of Canadian residents that has not been transferred to a UK court.
Some other ongoing legal claims include one by BP, who are trying to state that they may be partially covered by insurance policies issued to Transocean. A date and time for this hearing has not yet been determined. Four Mexican States filed a claim in a Texan court which was dismissed. The states involved have appealed the decision. Not all legal claims are based on the Gulf of Mexico spill, BP are also being investigated regarding the manipulation of the next day fixed price gas market at the Houston ship canal. The maximum penalty seems quite modest at just $28.8M, however. The penalty in regards to the historic issues at the Toledo refinery currently stands at just $80K, a review of the judge’s decision is underway. The court has dismissed most claims for damages relating to flaring at the Texas City refinery. The only remaining action there involves the federal government enforcement action. A settlement regarding the violation of the clean air act at the same refinery resulted in a charge of $950K pending court approval.
Underlying Upstream RC was $14.413B for the first nine months of the year compared to $15.061B for the same period of last year. For the third quarter, the result reflects lower sales due to divestments and higher exploration write-offs, somewhat offset by an increase in underlying volumes and a one off gain due to the US Federal Energy Commission approval of cost pooling settlement agreements between the owners of the Trans Alaska Pipeline (TAPS). Although production for the third quarter was actually 2.3% down in Q3 2012, discounting the effects of divestments and entitlement impacts in the production sharing agreements, underlying production actually increased by 3.4% due primarily to major new project volumes in the North Sea and Angola and the absence of weather related downtime in the Gulf of Mexico. Underlying production in the first nine months was up by 3.1%, although down by 3% including one-off items. In Q4, volumes are expected to be broadly flat with increased costs due to the absence of the one-off TAPS pooling benefit.
In the quarter a number of milestones were reached including the installation of Clair Ridge platform jackets in the North Sea; the announcement of a new gas condensate discovery off the East coast of India; a significant gas discovery in Salamat in the East Nile Delta; gas production was started at the Woodside operated North Rankin 2 project in Australia, in which BP has a 17% stake; and the start of three farm-out agreements with Kosmos energy covering three blocks in the Agadir basin offshore Morocco. Under the terms of this agreement, BP will acquire a non-operating interest in the blocks.
Downstream RC had a similar decline than in upstream, down from $5.069B to $3.562B due to much lower Q3 production. The results in Q3 include $157M of charges due to the reassessment of environmental provisions. The RC for the fuels business was $2.434B compared to $3.993B in the same period of last year as third quarter results were impacted by weaker refining margins along with the absence of earnings from the divested Texas City and Carson refineries. Another factor impacting the nine month result was the planned outage at the Whiting refinery as part of the modernisation project which should be up and running by Q1 2014. Next quarter, the group expect refining margins to remain under pressure due to very high gasoline stocks and increased competitor capacity. RC at the lubricant business for the first nine months of the year was $1.042, actually up from last year’s figure of $956M as targeted marketing programs contributed from the strong performance of the premium Castrol brand. It was notable that during the period about 50% of sales came from emerging markets. The Petrochemical RC was a mere $86M compared to $120M in the first nine months of last year as both margins and volumes remained under pressure. The situation did improve in Q3 compared to Q2, however, which might bode well for the end of the year.
The Rosneft RC this year was $1.111B whereas last year TNK-BP had an RC of $2.903B. Overall underlying RC for the year was $10.619B, down from $13.219B and included positive impacts from foreign currency exchange, a favourable duty lag effect and higher oil prices. This also included a £456M dividend payment which is not expected to be repeated before the end of the year. The underlying RC lost for other business segments was $1.284B, an improvement from the $1.548B loss in the same period of last year and this result included a non-operating charge of $430M due to changes in environmental provisions. There was an increase in the amount of power generated from the wind farms and also an increase in production from the three biofuel mills in Brazil.
Net debt at the end of the period stood at $20.051B, down $7.414B from the end of last year when it stood at $31.325B due to the sale of assets and businesses, and the subsequent increase in cash balances but up from the end of the last quarter when it was $18.217. Profits before tax were up by $14.191B but it must be remembered that $10.787B came from business sales and there was $3.96B less impairments on those business sales. Net tangible assets improved by £10.424B which seems to be mainly because $19.315B of assets held for sale was turned into $12.213B investment in Rosneft and $9.846B in cash so it seems that BP did get a decent amount for the BP-TNK sale compared to the book value. As far as cash was concerned, the capital expenditure was higher than the net cash from operations which was a worry but it was of little importance this year due to the huge $17.743B cash injection from business sales. RC profit was down across all business sectors except lubricants with the Fuels business doing particularly badly due to divestments and poor refining margins which do not look like improving any time soon. The Gulf of Mexico disaster did seem quite during the period and a decision actually seemed to go BP’s way for once! A dividend of 9.5c was announced for Q4 which was an increase of 0.5c on the last quarter, which relates to an annual yield of 4.9% which is just about worth holding onto in my opinion.
On 16th December BP announced that they had signed a gas sales agreement with the government of Oman for the development of the Khazzan field with BP as operator. The development will involve a drilling programme of around 300 wells over a 15 year period with ultimate volume of one billion cubic feet of gas per day along with 25,000 barrels a day of gas concentrate. The total investment in the project is likely to be around $16B, including the appraisal expenses to date so it is a major project involving an unconventional gas source that requires significant expertise to access. The first gas will not be produced until 2017 and plateau in 2018. The agreement also included a joint venture to develop a one million tonne a year Acetic Acid plant that may be ready by 2019.
On the 18th December the group announced that the new coker was commissioned at the Whiting refinery which was the last new major unit to come be updated. The reconfigured refinery can now greatly increase its heavy sour crude processing and is expected to deliver an incremental £1B of operating cash flow per year dependent on market conditions once it is properly up and running by the end of Q1 2014. This seems to have been delivered on time and as expected and I must say the projected cash flow from this refinery is rather impressive.
Also on the 18th December it was announced that the group made a significant oil discovery at the Gila prospect which is co-owned by Conoco Phillips in the Gulf of Mexico. This is the third Paleogene discovery made in the Gulf of Mexico since 2006. Appraisal drilling will be required to determine the size and potential commerciality of the discovery. It is good to see that BP is making discoveries such as these, it is just a shame that their name is mud in the Gulf of Mexico!
On the same day the group announced a number of other exploration updates. There was an oil discovery at Pitu in the frontier deepwater of the Potiguar basin in Brazil. The well is operated by Petrobas and BP holds a 40% stake. At the Lontra oil and gas discovery in Angola a drill test recorded a flow rate of 39M cubic feet of gas and 2,500 barrels of condenstate a day which is a pretty good find. BP only owns 30% of this discovery operated by Cobalt International Energy. It was not all good news, however, as the Pitanga exploration well in the Camamu-Almada basin in offshore Brazil did not show any commercial quantities of oil and gas and BP will relinquish this block. This will trigger a write-off of $220M related to the costs of drilling the well and a $850M write-off associated with the value of this block on acquisition which is clearly a blow.
As the share price seems to have done fairly well over the last few weeks I have decided that I would be more comfortable selling the shared before the court case is decided as I do not think there is a good enough upside for the risk that is involved and as I am sitting on a decent paper profit I have decided to sell my holding here.