BP Earnings Preview: Profits Set to Surge Despite Oil Spill

BP Hayward
BP Hayward

The failure of BP's (BP) Deepwater Horizon oil rig in may have dumped as much as 184 million gallons of crude into the Gulf of Mexico, according to U.S. government estimates, but the accident probably hasn't put much of a damper on second-quarter earnings for the energy giant, whose quarterly revenue was probably about 20 times higher than the costs-to-date of the worst oil spill in U.S. history.

BP is expected to report Tuesday that its second-quarter earnings per share rose about 48%, thanks in part to oil prices that were about 40% higher than a year earlier and topped the $85-a-barrel mark for the first time in a year and a half.

That price spike offset the effects of costs related to the accident on the Deepwater Horizon off the coast of Louisiana, which killed 11 workers. BP owns 65% of the rig.

BP is expected to report earnings of about $1.39 a share. Revenue is estimated to have jumped 28% from a year earlier to $72.6 billion, according to the average estimate of analysts in a Thomson Reuters poll. Second-quarter profits in 2009 were 94 cents a share.

Serious Cleanup Costs, Damages Loom Ahead

Earnings-wise, however, this may have been a last hurrah of sorts for the company, whose American depository shares closed Friday at $36.86, down 39% since the April 20 explosion.

BP, which said it had skimmed or burned off about 45 million gallons of oil as of July 17, announced earlier this month the creation of a $20 billion fund to cover explosion-related costs, while adding that it had already spent about $3.95 billion on the spill, including $207 million in payments made directly to 67,500 people affected by the accident.

But BP's spill-related tab may rise much higher, to as much as $33.5 billion over the next three years, Citibank analyst Mark Fletcher wrote in a July 15 note to clients. Additionally, its future drilling prospects in the Gulf may be compromised, according to Argus analyst Philip Weiss.

"Of greater concern to us is the incident's potential implications incident on BP's long-term business operations, particularly when we consider that BP is currently the largest producer in the Gulf," wrote Weiss in a note to clients Friday. "In short, the biggest unknown about the accident is what impact it may have on future offshore exploration and development activity."

CEO Hayward On His Way Out

Already, the company is making plans to drum up cash while addressing public concerns over its leadership. BP last week agreed to sell U.S., Canada and Egypt assets to Apache Corp. for $7 billion in order to raise cash to address obligations related to the spill.

Additionally, BP CEO Tony Hayward, who's been criticized for his handling of the incident, is likely to lose his job this week to Managing Director Bob Dudley, who is heading the company's cleanup efforts, the Associated Press reported Sunday, citing an unnamed U.S. official.

In a statement released early Monday, BP said no decision had been made yet about Hayward, but that the company had scheduled a board meeting for late in the day.