BP plc’s Q3 Results Beat Expectations

Oil giant BP (LSE: BP) (NYSE: BP.US) announced its third quarter results today and, despite all of the headwinds facing the company, the FTSE 100 stalwart beat City expectations.

Third-quarter revenue fell 2.8% to $93.9bn, beating City estimates that were calling for revenue of $93.4bn. Underlying replacement cost profit for the period, a figure that includes the replacement cost of supplies, declined 18% to $3.0 billion, although once again this beat estimates. The City was expecting a profit of $2.9bn. 

BP’s production for the quarter, including the company’s share of Rosneft’s production, fell slightly to 3.15m barrels of oil equivalent per day, down from 3.17mboe/d as reported during the third quarter of last year. 

Multiple concerns

However, despite today’s set of relatively upbeat results, there’re plenty of reasons to continue to be sceptical about BP’s outlook. 

For example, the company still owns around 20% of Russian oil giant Rosneft, which has begun to feel the effect of tough sanctions placed on Russia, as a result of the country’s involvement in the Ukraine crisis. BP warned earlier this year that international sanctions against Rosneft could have “a material adverse impact” on its Russian business.

Alongside its Russian troubles, a few weeks ago BP was also found guilty of gross negligence and wilful misconduct in the 2010 Deepwater Horizon disaster, exposing the company to penalties of up to $18bn. Management noted within today’s results that: 

“As at 30 September 2014, the cumulative charges to be paid from the Deepwater Horizon Oil Spill Trust fund reached $20 billion. Subsequent additional costs, over and above those provided within the $20 billion, will be charged to the income statement as they arise.”

This implies that BP could be forced to take some hefty charges over the next few months, or even years, as additional claims from the spill emerge. 

What’s more, like almost all of its peers, BP is trying to grapple the falling oil price as global supply out paces demand. 

Lots of risk

Today’s results are a real reminder that while BP is a highly profitable company, the group is still facing many challenges. 

Nevertheless, it seems as if the market has already priced in many of these risks as the company’s current valuation is significantly below that of its peers. In particular, at present levels BP trades at a forward P/E of 9.5 and supports a dividend yield of 5.3%.

Further, barring any foreseen surprises, the City expects BP’s earnings to rise 6% during 2015, which puts the company on a 2015 P/E of 8.9. City figures also suggest that the company’s dividend yield will hit 5.8% by 2015.

In comparison, BP’s peers in the oil & gas producers’ sector trade at a P/E of 12.4 and support a yield of 4.1%. 

The bottom line

All in all, BP’s third-quarter results showed that the company is still moving forward and is highly profitable. However, BP is still facing many challenges and the company’s low valuation reflects that.