BP’s 2010 Performance Muddied by Gulf Oil Spill

March 16th, 2011 by Trefis Team
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BP (NYSE:BP) recently announced its performance figures for the year 2010. Based on the release, we have updated our price estimate for the company to $49.38. This price is at a premium of around 7% from BP’s current market price of around $46. BP is one of the world’s leading oil & gas companies with operations in more than 80 countries providing customers with fuel, energy, retail services and petrochemicals products for everyday items. It is the third largest of the six oil & gas ‘supermajors’ after Exxon Mobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.B). Its other competitors include Chesapeake (NYSE:CHK), Anadarko (NYSE:APC) and Chevron(NYSE:CVX).

2010 Numbers for BP at a glance

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BP reported a net loss of $3.3 billion for 2010. The company had been able to remain profitable even through the global economic crisis of 2008, generating a profit of $21.7 billion and $16.8 billion in 2008 and 2009 respectively. Although revenues had dropped in 2009 from its peak of $361 billion in 2008 to reach $239 billion in 2009, there has been an almost 25% improvement in the top-line performance for 2010.

The negative bottom-line impact despite the strong top line growth is almost completely attributed to BP’s liability in the Gulf of Mexico oil spill.

The Deepwater Horizon Oil Spill and its Impact

In April 2010, an explosion in the BP-operated Deepwater Horizon drilling rig resulted in the world’s biggest oil spill. [1] The spill which continued for 3 months resulted in almost 4.9 million barrels of oil leaking into the Gulf of Mexico.

BP initially anticipated that the spill would cost it a total of $40 billion including the costs for cleanup and compensation. However, the fact that the company incurred almost $41 billion as expenses related to the spill in 2010 itself indicates that the actual costs would be much higher than the initial estimates. In fact, some estimates suggest that BP may actually incur a 12-figure expense related to the disaster. [2]

We have incorporated the higher costs associated with the spill for BP. It is interesting to note, however, that the extremely high costs incurred by the company due to the accident also means that the company would have a tax benefit of about $1.5 billion for 2010, and similar benefits can be expected for at least 2011 and 2012.

While the financial impact of the oil spill will only last a few years, the incident no doubt will leave its indelible mark on the company’s record forever.

See our full analysis and $49.38 price estimate for BP

Notes:
  1. BP leak the world’s worst accidental oil spill, The Telegraph, Aug 3 2010 [↩]
  2. BP oil spill could cost $100 billion, The Telegraph, June 18 2010 [↩]