BP’s Second Quarter: Trials, Taxes, and a Miss

Oil Refineries

BP (NYSE:BP) released second-quarter earnings Tuesday morning that failed to impress investors. Shares fell as much as 3.5 percent on the New York Stock Exchange in morning trading after the oil company reported earnings of $2 billion, well below the average analyst estimate of $2.56 billion.

BP pointed at relatively low oil prices, unusually high taxes, unfavorable exchange rates, and additional provisions for the 2010 Deepwater Horizon disaster as contributors to the low earnings. The company experienced an underlying tax rate of 45 percent in the second quarter compared to 35 percent in the year-ago period. The difference was largely due to the strength of the dollar.

Replacement cost profit before interest and tax was $4.99 billion, up substantially from the year-ago period, but the comparison is abnormally favorable.

BP Cash Flow

Source: BP

Operating cash flow in the second quarter was $5.4 billion. BP has targeted 50 percent growth in operating cash flow between 2011 and 2014 at $100 per barrel of oil.

Underlying production of oil and gas increased 4.4 percent on the year, excluding Russia and adjusted for divestments and production agreements. Third-quarter upstream production is expected to decline, largely because of seasonal factors.

Pre-tax replacement cost profit for upstream operations actually declined fractionally on the year, from $4.4 to $4.3 billion. Profit for downstream operations increased by the same margin, from $1.1 to $1.2 billion.

BP’s payments to victims of the 2010 Gulf oil spill have reached nearly $4 billion. The company is currently waiting on an appeal asking to change the handling of the Gulf oil spill victims’ class action settlement. BP claims that businesses are fraudulently collecting money from the company, leaving less for the people who actually deserve payments.

The company ran a huge ad campaign, placing full-page ads in The New York Times, Washington Post, and The Wall Street Journal claiming that businesses were being encouraged to file false claims to damages.

Lawyers for the victims have fired back, saying that BP miscalculated the damage caused by the spill. Judges from a federal appeals court panel were also skeptical when they were asked to review the case, openly questioning why BP would pay claimants who were not damaged by the oil spill. BP claims that in an effort to move past the spill, it was too liberal with paying damages, but now the company is worried about those damages cutting into its profits.

Here is BP’s second-quarter earnings deck:

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