Earnings Preview: Refining Efficiency Could Be Key to BP's Results

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Whatever happened to those forecasts for $30 oil? The reality is tht crude will likely revisit the $100 per barrel (and beyond) in the year ahead, if the U.S./global economic recoveries continue to progress. That bodes well for integrated oil and natural gas giant BP (BP), which reports fourth-quarter earnings on Tuesday, Feb 2. before the market opens. (The report is scheduled to be released 7 a.m. London time, 2 a.m. ET.)Look for BP's strong upstream (oil exploration and production) operations and a high average oil price in 2009 to produce a fourth-quarter and 2009 revenue/earnings performance in-line with the consensus estimates.

The Thomson/Reuters First Call fourth-quarter earnings per share consensus estimate for BP is $1.51 and the full-year 2009 EPS estimate is $4.73. Thomson/Reuters First Call also expects BP to earn $1.50 cents and $6.71 cents in first-quarter 2010 and in full-year 2010, respectively. BP also pays a dividend of $3.36 per year.

Downstream Problems

To keep institutional investors happy, BP will have to post a quarterly revenue gain of at least 2%, with stabilized margins. Concerning production, upstream operations have been fine -- well on their way to about 4.3 to 4.4 million barrels of oil equivalent per day in 2012.

BP's problem has been poor margins in downstream (refining) operations. That's where the company will have to show increased efficiency and cost reductions. Investors should also be on the lookout for any signs of continued reduced production from BP's Russian joint venture, TNK-BP.

BP's stock price has been in a choppy uptrend for about one year, and it recently pulled back about $6, to $56 per share, during the Dow's January sell-off. According to fundamental/technical analysis, the recent drop could be a buy opportunity, but the stock isn't for the squeamish: A 10% (or larger) price drop can occur in a month, so don't buy BP if you're a low-risk investor.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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