BP third quarter profits lower on Gulf oil spill cost of $39.9 billion

LONDON, U.K. – Oil giant BP (BP PLC) dropped to a lower profit of $1,785 million in the third quarter of 2010 but BP said it is on the road to profitability despite the billions it has cost to deal with the Gulf oil spill.

“Strong operating performance across the group helped it return to profit in the third quarter of 2010 despite an additional pre-tax charge of $7.7 billion in respect of the Gulf of Mexico spill,” BP said.

“Headline replacement cost profit for the third quarter was $1.8 billion, compared with a loss of $17.0 billion in the previous quarter and a profit of $5.0 billion in the third quarter of 2009.

“On an underlying basis, after adjusting for non-operating items, third-quarter replacement cost profit was $5.5 billion, an increase of 18 per cent on the year-ago quarter.”

“These results demonstrate that BP is well on track for recovery after the tragic accident on the Deepwater Horizon drilling rig and subsequent oil spill,” commented group chief executive Bob Dudley. “We have made good progress during the quarter. This strong operating performance shows the determination of everyone at BP to move the company forward and rebuild confidence after the terrible events of the past six months.

“We have also begun to make important changes in the way we operate across the Group – including creating a powerful Safety and Operational Risk function and restructuring the upstream segment – to ensure that safety and risk management are embedded as the absolute priority for every operation, for every person, throughout BP.”

The company said its Exploration & Production segment, now being restructured into separate functional Exploration, Development and Production divisions, recorded lower production volumes as a result of normal seasonal turnaround activities and as a consequence of the Gulf of Mexico oil spill. But its financial result was stronger than in both the previous quarter and a year ago, thanks to the improved price environment and lower depreciation.

Refining & Marketing recorded another good quarter, with refining availability remaining high and petrochemicals maintaining high production and utilisation rates. The US downstream business was profitable for the second successive quarter.

The additional pre-tax charge of $7.7 billion for the Gulf of Mexico spill followed a charge of $32.2 billion in the second quarter and was due principally to higher spill response costs. This reflected a delay in completing the relief well that finally sealed the Macondo well in September, additional mandated costs for decontaminating and demobilising vessels involved in the response, claims centre administration costs and additional legal costs.

BP said the total charge of $39.9 billion for the incident to the end of the third quarter represented its current best estimate of those costs that can be reliably measured at this time.

Third quarter 2010

Third quarter Second quarter Third quarter $ million
Nine months
2009 2010 2010 2010 2009
5,336 (17,150) 1,785 Profit (loss) for the period (a) (9,286) 12,283
(355) 177 62 Inventory holding (gains) losses, net of tax (242) (1,775)
4,981 (16,973) 1,847 Replacement cost profit (loss) (9,528) 10,508
26.59 (90.35) 9.83 – per ordinary share (cents) (50.73) 56.11
1.60 (5.42) 0.59 – per ADS (dollars) (3.04) 3.37

BP’s third-quarter replacement cost profit was $1,847 million, compared with $4,981 million a year ago. For the nine months, replacement cost loss was $9,528 million compared with a profit of $10,508 million a year ago.
The group income statement for the third quarter and nine months reflects a pre-tax charge of $7.7 billion and $39.9 billion respectively related to the Gulf of Mexico oil spill. All charges relating to the incident have been treated as non-operating items. Costs incurred relating to the incident were $8.7 billion in the third quarter and $11.6 billion in total since the incident. For further information on the Gulf of Mexico oil spill and its consequences see pages 3 – 5, Note 2 on pages 24 – 29, Principal risks and uncertainties on page 34 and in our second-quarter results announcement, and Legal proceedings on pages 34 – 38. Further information on BP’s third-quarter results is provided below.
Non-operating items and fair value accounting effects for the third quarter, on a post-tax basis, had a net unfavourable impact of $3,684 million compared with a net favourable impact of $307 million in the third quarter of 2009. For the nine months, the respective amounts were $25,686 million unfavourable and $315 million favourable. See pages 6, 20 and 21 for further details.
Finance costs and net finance income or expense relating to pensions and other post-retirement benefits were $335 million for the third quarter, compared with $311 million for the same period last year. For the nine months, the respective amounts were $777 million and $1,000 million.
The effective tax rate on replacement cost profit or loss for the third quarter and nine months was -16% and 33% respectively, compared with 29% and 33% a year ago. The effective tax rates for 2010 were impacted by the Gulf of Mexico oil spill, resulting in a particularly unusual rate for the third quarter. Excluding these impacts, the effective tax rate for the third quarter was 25% and for the nine months was 31%. The full-year effective tax rate, excluding the impact of the Gulf of Mexico oil spill, is expected to be around 31%.
Including the impact of the Gulf of Mexico oil spill, net cash used in operating activities for the third quarter was $0.7 billion and net cash provided by operating activities for the nine months was $13.8 billion, compared with net cash provided in the same periods of last year of $8.1 billion and $20.4 billion respectively. The amounts for 2010 included a net cash outflow of $9.1 billion and $10.6 billion for the third quarter and nine months respectively relating to the Gulf of Mexico oil spill.
Total capital expenditure for the third quarter and nine months was $6.7 billion and $17.6 billion respectively. Organic capital expenditure(b) in the third quarter and nine months was $4.7 billion and $13.0 billion respectively. Organic capital expenditure for 2010 is expected to be around $18 billion. Given the strength of our underlying cash flows and the investment opportunities available to us, our 2011 capital expenditure is currently under review and is expected to exceed the $18 billion previously indicated. Disposal proceeds for the quarter consisted of $3.7 billion for transactions completed in the period and $5.0 billion for deposits received relating to transactions expected to complete in subsequent periods. In July, the group announced plans to deliver up to $30 billion of disposal proceeds during the following 18-month period. Disposal proceeds received since that time and further amounts to be received under agreements already concluded total $14 billion. This includes some disposal proceeds relating to transactions agreed prior to 1 July 2010.
Net debt at the end of the quarter was $26.4 billion, compared with $26.3 billion a year ago. Net debt at the end of the quarter included $5.0 billion received as deposits for disposals completing after 30 September 2010, which is treated as short-term debt. The ratio of net debt to net debt plus equity was 23% compared with 21% a year ago. The net debt ratio at the end of the third quarter 2010 was impacted by the reduction in equity arising from the liabilities we have recognized in relation to the Gulf of Mexico oil spill. The group intends to reduce net debt to $10-15 billion by the end of 2011.
Cash costs(c) for the third quarter were broadly flat compared with the same period a year ago. For the nine months, they were slightly lower. Cash costs do not include amounts relating to the Gulf of Mexico oil spill.
On 1 October 2010, Robert Dudley became group chief executive, succeeding Tony Hayward who stepped down from the post by mutual agreement with the BP board.
(a) Profit (loss) attributable to BP shareholders.
(b) Organic capital expenditure excludes acquisitions and asset exchanges, and the accounting for our transaction with Value Creation Inc. and for the purchase of additional interests in the Valhall and Hod fields in the North Sea (see page 18).
(c) Cash costs are a subset of production and manufacturing expenses plus distribution and administration expenses. They represent the substantial majority of the expenses in these line items but exclude associated non-operating items, and certain costs that are variable, primarily with volumes (such as freight costs). They are the principal operating and overhead costs that management considers to be most directly under their control although they include certain foreign exchange and commodity price effects.

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Posted by News Editor on Nov 2 2010. Filed under More News. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry