The 2010 Deepwater Horizon disaster continues to cast a gloom over energy giant BP (NYSE:BP), with the company’s strategy of selling off assets to raise funds for damage payments resulting in a marked decline in production and profits. BP’s operating earnings (adjusted for one time items and inventory changes) for Q4 2012 stood at around $4 billion, compared to $5 billion a year earlier. For the full year, operating earnings stood at $17.6 billion compared to $21.7 billion in 2011.
Upstream Production Suffers From Asset Sales, New Projects In The Pipeline
The last quarter was marked by a major divestment by BP, with the company deciding to sell 50% of its stake in its Russian joint venture TNK-BP to Russian energy company Rosneft in October 2012. Considering the fact that TNK-BP contributed as much as 25% to the company’s upstream output before the divestment, the sale had a significant impact on BP’s earnings for the quarter.  Even with excluding the effects of the TNK-BP divestment, the company’s upstream production should come as a disappointment for investors, with production down by 7% over the same quarter in 2011. The company largely attributes this to other upstream divestments (mainly in the North Sea and China), various production sharing agreements and natural field declines.
On a more positive note, the company has been trying to mitigate the losses due to asset sales with new upstream projects across the globe. Two major upstream projects began production towards the end of the fourth quarter, one is an offshore development in Angola and another is in the Norwegian Sea. This makes it a total of five new major projects brought online in 2012. The company expects four new major upstream projects to start production by the end of 2013, and another six by 2014. This should boost long term confidence in the company’s upstream production outlook despite the current year’s slump. However, investors will need to remain patient as the company’s focus on new assets is unlikely to produce any remarkable returns in the coming year. The company expects reported production in 2013 to actually be lower than 2012.
Downstream Margins Take Toll On Earnings
The company’s performance in the downstream segment over Q4 2012 was largely impacted by low refining margins. This should come as a disappointment for investors considering that competitors such as Exxon Mobil (NYSE:XOM) have realized high downstream margins over the three months through December. Fourth quarter downstream production was also impacted by a planned outage at the Whiting refinery. With the company planning to ramp up its refining operations in 2013, such as an upgrade of the Whiting refinery in the second half of 2013, investors might have a better performance to look forward to in the coming year.
The company’s near term prospects seem uncertain at best right now with the latest news suggesting that BP’s bill for the 2010 spill may actually be revised up to $90 billion from its current $34 billion estimate.  If such a thing were to happen, we anticipate further forced sales of the company’s assets, impacting both production and profitability for a substantially longer time than we currently anticipate. BP is set to defend itself as vigorously as possible, but investors’ attention should be fixed on the outcome of this trial, which could make or break the company’s performance over the next few years.
Our Trefis price estimate for BP is $43, which we will be revising based on the latest results.Notes:
- “BP Earnings Fall on Lower Production and Higher Costs“, The New York Times, February 2013 [↩]
- “Claims may push BP’s spill bill to $90bn“, Financial Times, February 2013 [↩]