BP (BP)

Q2 2012 Earnings Call

July 31, 2012 9:00 am ET

Executives

Jessica Mitchell - Director of Group Investor Relations

Robert W. Dudley - Chief Executive Officer, Head of Disaster Management Unit, Executive Vice President and Executive Director

Brian Gilvary - Chief Financial Officer and Director

Analysts

Jon Rigby - UBS Investment Bank, Research Division

Martijn Rats - Morgan Stanley, Research Division

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Rahim Karim - Barclays Capital, Research Division

Douglas Terreson - ISI Group Inc., Research Division

Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division

Irene Himona - Societe Generale Cross Asset Research

Hootan Yazhari - BofA Merrill Lynch, Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Oswald Clint - Sanford C. Bernstein & Co., LLC., Research Division

Jason Kenney - Grupo Santander, Research Division

Guy A. Baber - Simmons & Company International, Research Division

Jason Gammel - Macquarie Research

Iain Reid - Jefferies & Company, Inc., Research Division

Kim Fustier - Crédit Suisse AG, Research Division

Joseph Tovey

Peter Hutton - RBC Capital Markets, LLC, Research Division

Presentation

Operator

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Welcome to the BP Presentation to the Financial Community Webcast and Conference Call. I'll now hand it over to Jessica Mitchell, Head of Investor Relations.

Jessica Mitchell

Hello, and welcome to BP's Second Quarter 2012 Results Webcast and Conference Call. I'm Jessica Mitchell, BP's Head of Investor Relations. And joining me today are Bob Dudley, our Group Chief Executive; and Brian Gilvary, our Chief Financial Officer.

Before we start, I'd like to draw your attention to our cautionary statement. During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors that we note on this slide and in our U.K. and SEC filings. Please refer to our Annual Report, stock exchange announcement and SEC filings for more details. These documents are available on our website.

Thank you, and now over to Bob.

Robert W. Dudley

Thank you, Jess. Our call today proves that not everything in London stops for the Olympics. We are operating our everyday business as usual around the world, as well as embracing our role as the Official Oil and Gas Partner of the Games.

Our results, at first glance, are weak for the period. There are specific reasons for this. Trading conditions have been particularly volatile, resulting in lower oil prices and lower contribution from U.S. gas. The sharp decline in oil prices has also led to some unusually large duty lag and ForEx effects in TNK-BP and adverse pricing of feedstock into our U.S. refineries. Added to this is the impact of the large planned maintenance program we have undertaken during the quarter in the Gulf of Mexico, which is part of enhancing safety and reliability for the future. Brian will provide details in a moment.

While I am not satisfied with the 2Q results, we are in the midst of a major transformation, which will take some time. As we deliver this transformation, we are committed to generating sustainable efficiencies in our operations.

Looking beyond the quarter, we continue to transform the company, and I want to give you a sense of that progress today. We are working to resolve a number of significant uncertainties of which you will be keenly aware. And we continue to implement the important longer-term strategic priorities that do not show up in today's quarterly results. We are advancing our 2012 milestones and remain confident that these milestones will deliver underlying financial performance momentum towards the midterm goals we have set out in our 10-point plan of what you can expect and what you can measure for 2014.

Our agenda will start with Brian taking you through the second quarter results. I will then give you an update on the legal proceedings in the U.S., take a few moments to share some thoughts about our recently announced intentions for TNK-BP and also bring you up-to-date on developments in India. We will then look at specifics around how we are doing with our 10-point plan. After that, there will be time for Q&A.

But first, over to Brian.

Brian Gilvary

Thanks, Bob. As Bob noted, our earnings for this quarter have been impacted by falling oil prices, the pricing of crude into our U.S. refineries, in addition to upstream turnarounds in the Gulf of Mexico, all of which I will provide more detail on.

I'd like to start with the broader environmental context that underpins some of the larger movements in the quarter. Data Brent declined sharply throughout the quarter on the back of a variety of factors. On average, data Brent was around $9 per barrel lower than the first quarter, but it is the rapid decline from a peak of around $126 a barrel at the start of the quarter to a low point of below $90 per barrel at the end of the quarter that has had a marked effect on our results, reducing realizations in the upstream but also creating particularly largely duty lag effects in TNK-BP. These effect has also had an adverse impact on crude pricing into our U.S. refining system.

In the United States, Henry Hub prices reached 10-year lows below $2 per Mcf during the second quarter, as warm winter weather, continued production growth and the high inventories forced gas to compete aggressively with coal for power sector demand. This has continued to weigh on contributions from our North American gas business. Outside the United States, gas prices have been held up by the continuing strong demand for LNG in Asia.

Refining margins, on the other hand, have continued to improve during 2012 as refinery run cuts and closures offset weakening demand growth.

Turning to an overview of the second quarter financials. BP's second quarter underlying replacement cost profit, after interest and tax, was $3.7 billion, down 35% on the same period a year ago and 23% lower than the first quarter of 2012. Group underlying replacement cost profit for the quarter benefited by $460 million from the consolidation adjustment from unrealized profit in inventory, reversing the loss reported in the first quarter.

Our second quarter headline replacement cost profit includes a pretax non-operating charge of $5 billion, which includes impairments of $4.8 billion, of which $2.7 billion went to downstream relating to the global refining portfolio predominantly in the United States, and $2.1 billion in the upstream related to U.S. shale gas assets and the decision to suspend the Liberty project in Alaska.

The underlying effective tax rate for the second quarter was 34%, the same as for the second quarter of 2011. Guidance for the full year effective tax rate remains at the range of 34% to 36%.

Second quarter operating cash flow was $4.4 billion, including $1.7 billion of post tax Gulf of Mexico oil spill expenses, of which $1.25 billion represents the payments into the Trust Fund.

In upstream, the underlying second quarter replacement cost profit, before interest and tax, was $4.4 billion, compared with $6.3 billion a year ago and $6.3 billion in the first quarter. The result versus a year ago largely reflects a weaker price environment, with Brent trading on average around $9 per barrel lower than a year ago and Henry Hub trading at an average $2 lower than a year ago.

This softness in Henry Hub has reached a point where our North American gas business is operating at a loss.

Production was 7.4% lower than a year ago, primarily due to divestments and offline production in the Gulf of Mexico. Underlying volumes, excluding TNK-BP and after adjusting for divestments and entitlement effects on our production-sharing agreements, reduced by around 2.7% year-on-year.

Costs also increased year-on-year, including higher DD&A, as we indicated earlier in the year, and the ongoing impact of sector inflation.

Compared to the first quarter, our second quarter result is $1.9 billion lower. Just over half of this related to the reduction in volumes concentrated at high-margin areas, with the balance relating mostly to the weaker price environment. Costs also increased slightly, primarily related to maintenance.

As we signaled at the time of our first quarter results, the second quarter brings the onset of seasonal maintenance and turnarounds, which are typically concentrated in the Gulf of Mexico. During the second quarter, we lost an average of 86,000 barrels of oil equivalent per day of production in this region.

There were a number of programs carried out on BP-operated facilities, as well on facilities operated by others. The most significant event was the complete replacement of the facilities on the seabed at Atlantis, which resulted in a shutdown of the facility for the entire quarter. Tropical Storm Debby at the end of the quarter also contributed to the drop in production.

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