BP today reported underlying replacement cost profit of $5.6 billion for the second quarter of 2011, an increase of 13% on the result for the same period last year.
The headline figure is slightly under analysts’ expectations, who in a Bloomberg survey gave an average profit expectation of $5.9 billion.
In a company statement, BP said the underlying profit primarily reflected higher oil and gas prices and refining margins, partially offset by lower production and higher costs. Rival supermajors – particularly Shell – are expected to outperform BP this year.
The quarterly dividend expected to be paid on 20 September 2011 is 7 cents per share ($0.42 per ADS). The company’s share price has shown only modest rises recently, despite Brent prices kissing $120 a barrel.
In the same period last year BP posted a $17 billion loss, following the Macondo disaster and ensuing oil spill in the Gulf of Mexico. For the half year, replacement cost profit was $10.79 billion, compared with a loss of $11.375 billion a year ago. Production is down 11% from Q2 2010 as a result of divestments and the Gulf spill.
The quarterly report says that BP “expects average unit operating cash margins to improve as new higher-margin projects come online. It will continue to invest to grow its upstream business, increasingly focusing on longer-term growth. Nine new projects are expected to come on stream in 2012 and 2013, most in higher-margin areas such as Angola, the North Sea and the Gulf of Mexico. BP will also continue to reposition its downstream segment, investing in businesses which underpin long-term growth and improved returns, and divesting others for value”.
Investors, noting the value added by Conoco Phillips’s announced split of it’s upstream and downstream businesses, are hoping that BP will do something similiar, either by splitting exploration and production (E&P) from downstream activity , or by divesting itself of less profitable upstream assets in the North Sea, and/or by offloading lower margin businesses such as refining and retail operations.
BP’s CEO Bob Dudley has already committed to selling some fields and half of the company’s refining capacity in the US. The company has been striving to maintain its dividend and repair it’s balance sheet after the liabilities from the Gulf Mexico.
Reuters reports that investors have been getting restive over uncertainty of BP’s underlying strategy. “Investors feel that the company has slightly lost its way,” Paul Mumford, fund manager at Cavendish Asset Management told Reuters. The company is still regrouping following the collapse of the proposed Rosneft arctic exploration deal earlier this year, though significant emerging markets commitments – such as a $15 billion gas E&P investment in Oman – have been made.
Dudley commented on the results in a company statement that “BP is a company that is changing rapidly. Having stabilised the company while living up to our commitments in the US, we will now increase our focus on performance and long-term value creation. We are committed to seeing the true value of the business more strongly reflected in our share price.”
That last sentence may get analysts’ tongues wagging. BP’s exploration and production assets are undervalued by around 40 percent within the integrated business, and splitting up the company could unlock as much as $100 billion for investors, US investment house JPMorgan Cazenove said this month. Citywire reports that BP directors have already mooted a split to key investors.
However, an intergrated model is likely to remain the best way of exploiting unconventional resources such as Canadian oil sands and US shale gas.
Undertaking a split or structural reform of the business may also be risky before the liabilities from the Macondo disaster are fully known. The company has placed $20 billion in an escrow fund, and has paid out nearly $7 billion to date, but some industry estimates place the company’s total liability up to $80 billion.
