BP Plc (NYSE:BP) is scheduled to report its third quarter earnings on October 30. The British oil & gas major had a weak second quarter with a y-o-y adjusted earnings drop of 35%. This was the due to a combination of many factors, including weak crude oil and natural gas prices, a decline in production as a result of extensive maintenance downtime and asset sales following the 2010 Gulf of Mexico oil spill, a large write down of its US shale gas assets, larger cash outflows related to the oil spill, and tax issues in Russia.
The situation looks similar this quarter as we expect average price realizations on liquids and natural gas to remain depressed and production to be lower due to additional asset sales. Production in the Gulf of Mexico, which accounts for a substantial portion of BP’s US liquids production, took another hit as Hurricane Isaac disrupted operations in the region during the first two months of the quarter. The downstream segment will face a similar situation with production declines primarily due to the sale of refineries and other downstream assets.
On the other hand, the firm recently announced the sale of its 50% stake in TNK-BP to Rosneft, which will provide it with around $12 billion in cash and increase its stake in Rosneft to near 20%. This spells the end of its turbulent partnership with AAR in TNK-BP and marks a new beginning for the company in Russia, where it will probably work with Rosneft in the development of untapped Arctic energy reserves. Long term, this has the potential to be a very positive development for the company. (Read BP Switches Partners In Russia Through Sale of Stake In TNK-BP To Rosneft)
Asset sales will hurt upstream and downstream production
BP has been forced to sell several of its assets in order to pay off expenses related to the 2010 Gulf of Mexico oil spill. Proved reserves of consolidated subsidiaries at the end of 2011 stood at 11.4 billion barrels of oil equivalent (boe) compared to 12.6 billion boe at the end of 2009. Similarly, the number of worldwide retail sites stood at 21,800 at the end of 2011, compared to 22,400 in 2009.
The company has sold a number of assets this year as well, including interests in a number of oil and gas fields in the Gulf of Mexico, its Texas City refinery and a number of other assets during the first half of the year. Overall, excluding the sale of its stake in TNK-BP, the company is estimated to have made divestments totaling more than $35 billion since the beginning of 2010.
While there a number of projects currently in the pipeline, including the development of recently acquired blocks in Brazil and Venezuela as well as the recent startup of an offshore natural gas project in the North Sea, we believe that it will take a while longer for the company to reach the levels of production it had prior to the oil spill.
BP’s liquid production stood at an average of 992 thousand barrels per day in 2011. We project a slight decline in this figure over the course of our forecast period.
We currently have a Trefis price estimate of $46 for BP, which is around 10% above the market price.