BP 4Q Profit Slumps on Divestments, Weak Refining Margins, Write-Offs

BP today announced its financial results for the fourth quarter and full year of 2013. Underlying replacement cost profit for the fourth quarter was $2.8 billion, compared with $3.9 billion for the fourth quarter of 2012. Full-year underlying replacement cost profit was $13.4 billion for 2013, compared with $17.1 billion for 2012.

Compared with the same periods in 2012, both the fourth quarter and full year 2013 underlying results were affected by: the significant impact of BP’s major divestment programme; weaker refining margins; and higher depreciation and exploration write-offs as the group brought new projects online and increased its investment in exploration.

The impacts of these were partially offset by strong growth in underlying oil and gas production, particularly from key regions such as the North Sea, Angola and Gulf of Mexico. The fourth quarter’s result also benefitted from higher earnings from Rosneft than reported from TNK-BP in the fourth quarter of 2012.

Bob Dudley, BP Group Chief Executive, said: “BP delivered strong operating performance throughout 2013, with increased asset reliability and major project delivery in both our Upstream and Downstream businesses. These achievements underpin our financial targets for 2014 and lay the foundation for continued growth in sustainable free cash flow.”

Operating cash flow was $5.4 billion in the fourth quarter and $21.1 billion over the whole year. BP announced a dividend for the fourth quarter of 9.5 cents per share, to be paid in March, 5.6% higher than the fourth quarter dividend last year.

In March 2013 BP announced an $8 billion share buy-back programme and, as of January 31 2014, has spent around $6.8 billion repurchasing BP shares for cancellation. At the end of the year, BP’s net debt ratio, or gearing, was 16.2%, within the target range of 10-20%.

Organic capital expenditure in 2013 was $24.6 billion, in line with guidance. Organic capital expenditure is expected to be $24-$25 billion in 2014 and to remain in the $24-$27 billion range through to the end of the decade.

Following the completion of its $38 billion divestment programme, BP announced in October 2013 that it expects to divest a further $10 billion of assets by the end of 2015 and to use the post-tax proceeds predominantly for additional distributions, with a bias to share buybacks. To date, it has agreed around $1.7 billion of such further divestments.

Dudley said: “Capital discipline is central to BP’s strategy; making the right investment choices, sticking to our capital limits, and actively managing our portfolio in pursuit of long-term value.”

4Q 2013 performance

Underlying pre-tax replacement cost profit in BP’s Upstream segment was $3.9 billion in 4Q 2013, compared with $4.4 billion a year earlier. The result benefitted from higher underlying production and a one-off credit to production taxes but there were adverse impacts from divestments and higher depreciation and exploration write-offs.

Total reported production of oil and gas for 4Q 2013, including Russia, was 3.23 million barrels of oil equivalent a day (boe/d). Outside Russia, growth in underlying oil and gas production was driven by new production from high-margin regions. Underlying production excluding Russia in the quarter was 3.7% higher than in 4Q 2012, and up 3.2% for the full year compared to 2012, in line with guidance.

Reported production excluding Russia for the quarter was 2.25 million boe/d, 1.9% lower than in 4Q 2012, primarily due to the impact of the divestment programme.

Looking ahead, BP expects underlying production in 2014 to be higher than 2013. Reported production, however, is expected to be lower, reflecting both divestments and a reduction of around 140 thousand boe/d due to the expiry in January of the Abu Dhabi onshore concession.

BP’s Downstream segment reported underlying pre-tax replacement cost profit of $70 million, compared with $1.4 billion in 4Q 2012. The fuels business was severely impacted by: significantly weaker refining margins, particularly in the US; the absence of earnings from the Texas City and Carson refineries, which were sold in 2013; additional depreciation and start-up costs as a result of the Whiting refinery modernisation; and a weak result from supply and trading activities. 

In 2014, BP expects refining margins to improve somewhat from the low levels seen in the fourth quarter of 2013, but that in general the fuels and petrochemicals environments will remain challenging. Additionally, it expects to see increased exposure to heavy crude differentials in the US as heavy crude processing at the Whiting refinery ramps up.

Strong Downstream operating performance continued, with refining availability of 95.6% in the quarter, the highest level since 2004. Average refining availability for 2013 was over 95%.

In Russia, BP reported underlying net income of $1.1 billion from Rosneft for the fourth quarter, compared with $0.2 billion reported from TNK-BP for the same period in 2012, which included only 21 days of TNK-BP earnings. BP’s share of Rosneft oil and gas production in the quarter was 985 thousand boe/d.

Strategic progress

BP today reported a reserves replacement ratio for 2013 – on a combined basis of subsidiaries and equity accounted entities and excluding acquisitions and divestments – of 129%, compared with 77% in 2012. Including the net growth in BP’s Russian portfolio as a result of the change of its holdings, the ratio was 199%.

2013 was BP’s most successful year for exploration drilling for almost a decade. BP participated in 17 completed exploration wells, which made seven discoveries. Three discoveries were announced in the fourth quarter: the Gila discovery in the Paleogene trend in the Gulf of Mexico; the pre-salt Lontra discovery in Angola, operated by Cobalt International Energy; and the Petrobras-operated Pitu discovery in Brazil’s Equatorial Margin. BP was awarded licence interests in 14 blocks in the UK’s 27th licensing round, and was also awarded an interest in a block off north-east Greenland.

Three major upstream projects started up in 2013 and the Chirag Oil project in Azerbaijan began production on January 28. A further five projects are expected to begin production through the rest of 2014.

In December, final investment decisions were taken on two significant upstream development projects: the Khazzan tight gas project in Oman, and the Shah Deniz 2 project in Azerbaijan and associated pipelines.

The final major unit of the Whiting refinery modernisation project was brought on stream in the quarter. Following the divestment of the Texas City and Carson refineries last year, this represents a major transformation of BP’s US fuels business.

US legal update

The cumulative pre-tax charge for the Gulf of Mexico oil spill was $42.7 billion at the end of 2013, having increased by $0.2 billion in the fourth quarter to reflect an increase in the provision for legal costs, and ongoing Gulf Coast Restoration Organisation costs. The charge does not include any additional provision for business economic loss claims arising from the economic loss settlement with the Plaintiffs’ Steering Committee (PSC) that are yet to be received, processed and paid.

The cumulative amount estimated to be paid from the Trust Fund remained at $19.3 billion, leaving around $700 million unallocated headroom available in the Trust for further expenditures.

The District Court has yet to rule on the first two phases of the MDL 2179 trial which completed during 2013, and the Court could issue its decision at any time. The Court has not yet scheduled the penalty phase, in which it will hear evidence regarding the factors to be applied in assessing a penalty under the Clean Water Act.

In relation to the economic loss settlement with the PSC, after multiple hearings and appeals, the District Court has now agreed that revenues and expenses must be properly matched in assessing business economic loss claims. However, the District Court did not agree with BP’s interpretation of the causation requirements of the settlement agreement. BP has appealed the District Court’s ruling on causation to the Fifth Circuit Court of Appeals, requesting the panel hearing that appeal to issue a permanent injunction to prevent awards to claimants whose losses are not traceable to the spill. In the meantime, a temporary injunction remains in place for all business economic loss claims.

On 10 January, a different panel of judges of the Fifth Circuit upheld the validity of the economic loss settlement as written, but left to the other panel of the Fifth Circuit the question of interpretation of the settlement agreement, including the meaning of the agreement’s causation requirements. BP has filed a petition requesting that all the active judges of the Fifth Circuit review the decision upholding the validity of the settlement.