BP plc (NYSE:BP) (LON:BP) released the results for the second quarter of 2013 and saw stagnation in performance estimates amidst a slow global economy and declining oil prices.


BP sales grew but margins declined

BP registered net earnings of USD 2.7 billion for the quarter ended June 30, 2013 which was a decline of 26 percent over the same period last year and 23 percent on a QoQ basis. Overall sales grew by 1.5 percent to USD 95 billion but it registered a decline in net margins from 3.9 percent to 2.9 percent. However, consensus estimates indicate that the turnover will decline by 1.1 percent in the next quarter.

Table 1: Earnings for 2Q 2013 (USD million)


A higher tax rate was quoted by Bob Dudley, CEO of BP plc (NYSE:BP) (LON:BP), as one of the reasons for a decline in profitability. This impact was supplemented with declining margins resulting from an overall decline in global oil prices. The massive increase in capital expenditure in the current quarter is a positive for future earnings.

All the corporate oil giants were hit by these factors in the current quarter, BP being the last of them to release its results. The consensus estimate for BP’s EPS was at 0.18 but the official results missed this estimate by 19 percent. BP actually had one of the lowest reported EPS among its peer group this quarter.

Table 2: Earnings Comparison with Peer Group Companies

Source: Bloomberg
Source: Bloomberg

BP increased provisions for oil spill victims

Another major factor for the decline in profitability of BP plc (NYSE:BP) (LON:BP) was the increase in provisions and costs paid to the Gulf of Mexico oil spill victims. Compensation claims have been rising and BP reports that the fund it set up for this purpose was now running dry. A further provision of USD 200 million has been created in the current quarter, bringing the total provisioning for this cost to USD 42.4 billion.

BP has been experiencing some changes in the structure of its operations over the past five years. In the period since 2008, BP has seen a decline in the contribution of upstream activities to the overall revenues of the company and more and more of the company’s cash flows are coming from its downstream sector. In 2Q 2013, BP’s upstream revenues increased by 1.7 percent while those from downstream increased by 1.6 percent.

Figure 1: Composition of Revenues, 2008- 2013

Source: Company Filings
Source: Company Filings

Despite share buybacks by the firm during the first half of the ongoing year, the debt ratio was maintained at 12.3 percent, which is a positive indicator for investors about the company’s cash flows. The price of BP plc (NYSE:BP) (LON:BP) has remained above USD 40 over the past six months.

Figure 2: Share Price of British Petroleum, 2008-2013


Despite the assurances by Dudley, the outlook on the next quarter is pessimistic amid concerns on oil prices and impact of Gulf of Mexico claims. Given all these factors, we can expect the performance of the company to remain stagnant over the remaining portion of 2013.