BP Reports An Unimpressive End to 2011
Though the worst of Macondo appears to be behind it, the specter of the disaster is likely to haunt the company by challenging its ability to generate its hoped-for results for some time to come.
Market Update
Excluding a $4.1 billion credit related largely to its Anadarko settlement, BP's (BP) underlying results to end 2011 were on the whole unimpressive. Unsurprisingly, downstream results fell off, as refining margins were very weak in many regions during the fourth quarter. BP's downstream unit posted a profit of $564 million, $400 million less than the same period in 2010 and almost $1 billion less than the previous quarter. Downstream weakness appears likely to be short-lived, in our view, as refining fundamentals already have begun to show signs of improvement.
Far more important is BP's upstream segment, where replacement profit was down 5% to $7.6 billion from $8 billion in the prior year. This is in stark contrast to the upstream results of the other majors, where companies posted strong growth ( Shell (RDS.A) saw upstream profits grow by 48%, for example). Of course, BP has one hand tied behind its back: Forced asset sales to fund Macondo obligations and low levels of production in the Gulf of Mexico are taking their toll on results. Production volumes were down to 3.5 million barrels of equivalent per day from 3.7 million, with the U.S. being the geography where production figures showed the largest declines.
BP appears to hope that 2012 is the last year before it can start driving significant improvement in its results. Though production is projected to be flat, six major projects are expected to start up, and eight rigs are expected to be operating in the Gulf of Mexico. Adding this up, BP expects it can drive 50% operating cash flow growth by 2014 verses 2011 with oil prices at $100 per barrel.
In our view, such a feat is going to be difficult to accomplish, given that the company still has almost $20 billion in divestments it intends to complete. BP is projecting the cash flows from these divestments will only have a modest negative impact, which to us looks a little too optimistic. Though the worst of Macondo appears to be behind it, the specter of the disaster is likely to haunt the company by challenging its ability to generate its hoped-for results for some time to come.
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