Steady Goes The Big Ship - An Update On The Progress Of Transforming BP

Aug.27.12 | About: BP p.l.c. (BP)

A company with close to $400 billion of annual revenue is massive, which international oil company British Petroleum (NYSE:BP) most certainly qualifies as. Yet, the stock of BP remains stuck at the 40-42 dollar price per share. The current quote is nearly 30% below the $59.88 point when the Macondo oil spill occurred on April 20, 2010.

BP Chart

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Let's take a look at recent developments at the British oil giant in its effort to recover from the Gulf of Mexico disaster.

2nd Quarter 2012 Results

It may be hard to believe, but BP's management is trying to 'transform' it's huge operations to become more efficient. As it relates to that effort, BP's second quarter 2012 results were, in it's own words, "weak." Replacement cost profit was $3.7 billion, down 35% from the same period in 2012 and 23% from the first quarter of 2012.

The quarter includes a $5 billion pre-tax, non operating charge, $4.8 billion of which were impairments. The write downs consisted of two parts. The first was a $2.7 billion section related to the U.S. refining operations. The second included a $2.1 billion portion related to U.S. shale gas assets and the suspension of the Liberty project in Alaska.

Second quarter operating cash flow came in at $4.4 billion, which was down from $7.8 billion in the same quarter of 2011. However, the total improved by $1 billion as compared to the first quarter of 2012.

The breakdown of underlying earnings is as follows:

BP Underlying Earnings 2nd Quarter 2012
$ Billions 2Q 2011 1Q 2012 2Q 2012
Upstream 6.3 6.3 4.4
TNK-BP 1.1 1.2 .5
Downstream 1.4 .9 1.1
Other Businesses/Corporate (.3) (.4) (.5)
Consolidation Adjustment-Unrealized profit in inventory .5 (.5) .5
Underlying Replacement Profit before Interest and Tax 9.0 7.4 5.9
Interest and Minority Interest (.3) (.3) (.3)
Tax (3.0) (2.3) (2.0)

Underlying Replacement Cost Profit

5.7 4.8 3.7
Underlying Earnings Per Share (cents) 30.2 25.3 19.4
Dividend Paid Per Share (cents) 7.0 8.0 8.0
Operating Cash Flow 7.8 3.4 4.4
Click to enlarge

Of note was production volumes were down 7.4% because of previous asset sales and off line production in the Gulf of Mexico. Underlying volumes, excluding the TNK-BP partnership production and other adjustments, dropped 2.7%. BP stated they lost an average production of 86,000 barrels of oil per day because of seasonal maintenance, including a complete replacement of seabed facilities at the Atlantis oil field.

In the third quarter of 2012, BP expects production to be slightly lower than the second quarter. The company typically schedules maintenance on its large fields in the second and third quarter, and this year is no different with planned updates on the North Sea field currently taking place. BP expects production volumes to start increasing in the fourth quarter of 2012. For BP shareholders, waiting one more month before a full production schedule begins is not long and 2013 should be a much better year for volumes in the upstream portion of the business, as long as the company executes. Let's take a look at other notable developments at BP.

Recent Developments

  • On June 3, 2012, BP said it began the initial startup of the Galapagos project in the Gulf of Mexico. Full ramp up of the complex was expected at the end of June 2012. The work includes three deep water fields-Isabela, Santiago, and Santa Cruz, where the production flows to BP's Na Kika host facility. The Na Kika structure has a production capacity of 130,000 barrels per day.
  • On July 19, 2012, the company stated BP North America and Kinder Morgan Energy Partners (NYSE:KMP) agreed to a long term commercial arrangement where Kinder Morgan will provide storage and condensate processing services at Kinder Morgan's terminals. The terminal will eventually handle up to 100,000 barrels per day by the end of the first quarter of 2012 (up from the current 40,000 total).
  • On August 10,2012, BP announced it restarted oil and gas production at its Mad Dog and Atlantis fields. Atlantis has the capacity of 200,000 barrels of oil per day and 180 million cubic feet of gas a day and was off line during the entire second quarter. Mad Dog has a daily production capacity of 80,000 barrels per day and 40 million cubic feet of gas per day and was off line for 15 months.
  • On August 10, 2012, BP agreed to sell its Sunray and Hemphill gas processing plants in Texas for $227.5 million in cash. The plants have a combined processing capacity of 220 million cubic feet of gas per day and the transaction should close in the fourth quarter of 2012.
  • On August 13, 2012, BP and Tesoro Corporation (NYSE:TSO) reached an arrangement where BP will sell it's Carson refinery and ARCO retail network to Tesoro for $2.5 billion of cash. "Today's announcement is a significant step in the strategic refocusing of our U.S. fuels business," said Iann Conn, chief executive of BP's global refining and marketing business. "Together with the intended sale of the Texas City refinery, this will allow us to focus BP's operations and investments exclusively on our 3 northern U.S. refineries, which are crude feedstock advantaged." The three refineries Conn is referring to are all undergoing investments. BP is upgrading its Whiting refinery in Indiana to transform the crude processing potential and is supposed to be finished by the second half of 2013. BP is also improving its Cherry Point refinery to produce cleaner diesel fuel, as well as investing in a clean gas project at a joint venture refinery near Toledo, Ohio.
  • The sale of the Carson assets brings the total value of divestment of company assets since the start of 2010 to $26.5 billion. By the end of 2013, BP plans to divest $38 billion of assets.
  • BP is currently negotiating with different parties over its interest in the TNK-BP partnership in Russia. The outcome will not be known until at least the middle of October 2012, and probably after that. BP would prefer to sell all of its holdings in the partnership, but a $15-30 billion dollar price tag is a large price and there are other considerations for BP with the investments. Specifically, being able to explore in the artic region in areas around Russia as they are considered prime targets for oil discovery.
  • BP is continuing negotiations with the U.S. government over the liabilities related to the Clear Water Act in the Macando oil spill. The variance between what BP might be willing to pay and what the U.S. government will accept is large, reportedly over $10 billion. If no agreement is reached, a trial is scheduled for 2013.

The Bottom Line: BP is an enormous company in an industry which the world is dependent on. Almost all of the growth of oil usage is in Asia, but the slowing of demand in the United States is not expected to be significant any time soon. As time passes and 2013 approaches, British Petroleum should start to see its operations improve. If oil prices hold relatively steady, six months, one year, and even further on out, BP shareholders might be very glad they held on to their shares of this massive and changing company.

Disclosure: I am long BP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.