BP's Q2 a Mess; Outlook Still Very Uncertain

Morningstar analyst Stephen Simko explains what went wrong for BP in the second quarter

Stephen Simko, CFA 1 August, 2012 | 10:31AM
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Shares in the oil giant BP (BP.) suffered sharp losses on Tuesday after the company reported lacklustre results in the second quarter of 2012. Morningstar analyst Stephen Simko explains what went wrong for BP in his latest research note:

"BP reported messy second-quarter results, which included a $1.4 billion reported loss and $5 billion of impairments (related to its shale gas assets, US refineries, and a postponed upstream project in Alaska). These figures overstate the problems, particularly as the underlying performance of its downstream segment excluding impairment charges was sound ($1.1 billion adjusted profit before taxes, up $200 million from the first quarter).

"But BP's upstream results were indeed disappointing, as adjusted profits before taxes were $4.4 billion, way off the $6.3 billion generated both last quarter and in the year-ago period. There were a few reasons for this miss. Production was down by more than 80,000 barrels per day in the Gulf of Mexico compared to the first quarter due to maintenance and workovers. Also, Russian oil realizations fell hard, which caused TNK-BP's profits to tumble. Finally weak North American natural gas prices materially pressured margins there. Although this may turn out to be BP's trough quarter of 2012, this demonstrates that operationally BP remains a significant work-in-progress. We believe there is a good chance the company won't be truly turning the corner for at least another year.

"With respect to the sale of its stake in TNK-BP, little incremental information was provided, although it is clear that the relationship between BP and its Russian partners remains toxic. Management did say any deal could take months to consummate, if reached at all. As we have stated previously, although selling out its TNK-BP stake would reduce risk, BP does not have access to oil and gas resources that can match the returns that are realized producing onshore oil in Russia. If divested, we expect BP's overall returns on capital to fall by 1%-2% for at least the next few years."

Premium members can read Simko's full assessment of BP, including his take on the company's management, financial health and risk profile. (Not a Premium member? Get instant access to Morningstar research and other tools with a free 14-day trial.)

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Stephen Simko, CFA  is a senior stock analyst at Morningstar.

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