Unpacking BP's record profits (against its substantial losses?)!​

By Jake Rickman​

What do you need to know this week?

BP — the oil & gas giant — has posted record quarterly profits at over $6.2bn from 1 January to 31 March 2022. This figure, which was released as part of its earnings on Tuesday, far exceeds analyst forecasts of $4.5bn. BP’s quarterly success is largely attributed to the “exceptional oil trading result” owed to inflation and supply chain issues, which have been aggravated by Russia’s invasion of Ukraine.

In the same period, BP reported a loss of $20.4bn, which it attributes to its stake in Rosneft, the Russian oil conglomerate.

Why is this important for your interviews?

For some interviews and vacation schemes, the firm may provide you with a fictitious company’s financial accounts which you must use as part of your advice to the client. Though they appear daunting at first, as you will hopefully see, accounts start to make sense if you just take the time to review enough of them. Getting comfortable with digesting company accounts will improve your interview performance, as well as your fundamental understanding of a business’ key drivers.

In the case of BP, quite rightly, you may be wondering how a company can report record profits while also reporting substantial losses in the same period.

The answer reveals itself in the company’s quarterly earnings, which, as a public company, is available for all to inspect.

When looking at accounts, the first thing to remember is that each company will prepare them differently. The first line of BP’s “financial summary” says that its profit/(loss) “attributable to shareholders” is (20,384) — i.e., it lost $20.384bn (the figures given should be multiplied by $1m).

Underneath this first figure are other seemingly unclear terms, like replacement cost profit, which is $6.2bn.

By reading the notes (especially note 2 on p 22), we get a clearer idea of what has happened: following Russia’s invasion of Ukraine, two of BP’s directors resigned from the board of Rosneft. Russia later imposed countersanctions on foreign investors, which restricted BP’s ability to easily sell its shares.

The effect is that BP had no control over Rosneft, nor would it be able to share in any of its proceeds. As a result, its accountants essentially wrote the complete value of its investment in Rosneft off.

In other words, though BP reported a loss, it does not mean it has lost cash. It just had shares in a company that, though previously valuable, are incapable of being valued, so BP treats this as a loss.

It has still brought in $6.5bn in cash (minus expenses), which suggests the underlying business is doing remarkably well.

How is this topic relevant to law firms?

To qualify as a solicitor, you must demonstrate an understanding of basic accounting, regardless of your practice area. This is because solicitors frequently hold clients’ money in their business accounts. You must therefore know how to account for their money, apply it appropriately, and never use it for unauthorised purposes.