BP, the first oil major to report second-quarter results, said earnings fell 45 per cent as lower crude prices continued to erode income.
Profit adjusted for one-time items and inventory changes dropped to US$720 million from $1.3 billion a year earlier, the London-based company said Tuesday. That compares with the $819m average estimate of 13 analysts surveyed by Bloomberg. Downstream earnings, which include refining, totalled $1.51bn, down 19 per cent.
Brent crude’s 25 per cent increase in the quarter provided some prospect of relief after a two-year slump that forced explorers to delay projects and eliminate thousands of jobs. The BP chief executive Bob Dudley, who has cut billions of dollars of spending at Europe’s third-biggest oil company, still faces a difficult road ahead as crude’s rally fades amid slowing demand growth and returning production from Canada to Nigeria.
Brent averaged $47.03 a barrel in the quarter compared with $63.50 a barrel a year earlier and $35.21 a barrel in the first quarter of this year.
BP has said it has the option to reduce investment to as little as $15bn in 2017 from $17bn this year if oil prices remain low. Mr Dudley is slashing expenditure so he can continue to pay dividends, which he says is the company’s top financial priority.
The cost cuts mean BP will be able to balance cash flow with shareholder payouts and capital spending at an oil price of $50 to $55 a barrel next year, the company said in April. That is a reduction from a previous estimate of $60.
BP’s shares have risen 24 per cent in London this year following two years of declines. That compares with a 36 per cent gain at Royal Dutch Shell and a 2.4 per cent increase for Total.
While oil’s lows led to losses at BP’s exploration and production business in the previous two quarters, they have boosted earnings for its refineries as they benefit from cheaper crude. Global refining margins averaged $13.80 a barrel in the quarter through June compared with $10.50 in the preceding three months, according to the company’s website.
The margin has dropped to $10.70 a barrel this month. At the same time, the rebound in crude prices is petering out. Production shut down by wildfires in Canada and by militant attacks in Nigeria is returning and shale drillers in the United States are bringing back some rigs. While there is still consensus that the worst of the oil glut is over, the International Energy Agency cautioned this month that “the road ahead is far from smooth”.
BP’s quarterly results are likely to be an indication of how the other oil majors will perform. Shell and Total are scheduled to publish earnings on Thursday, and ExxonMobil and Chevron the following day.
If this is as good as it gets for BP in 2016, investors have cause to feel a touch underwhelmed, said Bloomberg’s Chris Bryant. There were no big nasties in Tuesday’s second-quarter earnings update – adjusted replacement cost profit fell short of expectations but not shockingly so.
Still, it is not possible yet to have full confidence in Mr Dudley’s plan to put the funding of the dividend on a sustainable footing and thereby prevent a further erosion of BP’s balance sheet. That is unfortunate because while a recovery in the oil price has lifted BP shares, the stock lags behind rival Shell. BP needs a catalyst but the second quarter did not provide one, Mr Bryant said.
Drawing a line under its Deepwater Horizon liabilities should help, of course. BP booked a $5.2 billion pretax charge related to the spill during the quarter, bringing the total to an eye-watering $61.6bn. The one shred of comfort for investors, if you can call it that, is that the Macondo disaster prompted BP to start selling assets and cut costs before crude collapsed. Today, the company runs a relatively tight ship and gearing (the ratio of net debt to equity) is an elevated, yet manageable, 24.7 per cent.
But unlike Shell, which completed the takeover of BG Group in January for about $52bn, BP will not find it easy to sell a convincing growth story to investors – even though it is trying. It has promised to add 500,000 barrels of oil equivalent of new production capacity by the end of next year, for example.
Little wonder that there is such focus on BP’s plan to balance cash flows in 2017, which would mean it does not have to borrow to pay dividends. Unfortunately, the BP plan relies on oil reaching $50-55 per barrel, whereas Brent has recently fallen back below $45.
Refining margins have also deteriorated in recent weeks – a worry for the sustainability of the downstream profits that have offset upstream difficulties in recent quarters, added Mr Bryant.
The company is doing what it can, lowering capex guidance to below $17bn for this year. But slashing spending further only increases scepticism about the company’s long-term earnings. BP is out of intensive care but its rehabilitation could take time and there is a risk of a few relapses along the way, he said.
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