BP Q4 Earnings: Profits And Cash Flows Suffer Due To Low Oil Price Environment, Company Focuses On Cost Cutting

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BP Plc. (NYSE:BP) released its 2015 fourth quarter and full year earnings report recently. [1] The company’s upstream price realizations continue to suffer due to the prevalent low oil price environment. As a result, BP’s revenues and earnings have taken a massive hit in 2015 with the notable exception of downstream margins and earnings. BP is taking measures to reduce its capital spending and overall cost structure in order to be able to better steer through this commodity trough. However, even with all the spending cuts, the cash outflows were greater than cash inflows for 2015. If the price realizations continue to stay at these depressed levels for longer periods, the company will find it extremely hard to sustain its dividend program without resorting to external borrowing.

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Low Oil Prices Hurt BP’s Upstream Operations, But Downstream Performance Emerges As Silver Lining

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The extended period of low crude oil prices has hurt the company’s upstream operations in 2015. Even though BP increased daily hydrocarbon production in 2015 by 5.4%, the company’s average price realized per barrel from liquids for the year dropped to below $46 as compared to $88 for the whole of 2014. [2] Resultantly, BP’s 2015 full year underlying replacement cost profit came in at $5.9 billion, a year over year decline of 51%. The company’s operating cash flow for 2015 was $19.1 billion as compared to $32.8 billion in 2014. [3] Even though BP reduced its spending and suspended its share buyback program, the cash outflows were greater than cash inflows for 2015.

BP Annual Reporting

BP Annual Reporting

Brent crude oil spot price averaged close to $52 for the full year 2015 and is currently hovering around the $35 mark. The abundant supply of oil coupled with slower demand growth essentially means that the low energy price environment will continue to persist in the near term. If the price realizations continue to stay at these depressed levels for longer periods and cash outflows continue to exceed inflows, the company will find it extremely hard to sustain its dividend program without resorting to external borrowing.

BP’s downstream operations have been the silver lining for the company in 2015. BP’s downstream margins have improved significantly because of the improvement in the refining environment in general, and increased refinery optimization by the company. Consequently, BP’s downstream replacement cost profit before interest and tax has increased by more than 90% for the full year 2015 as compared to the year ago figure. [2] BP’s average refining marker margin (RMM), which is a measure of the difference between the price a refinery pays for its inputs (crude oil) and the market price of its products, increased by 18% y-o-y to $17 per barrel for the year 2015. In addition to higher refining margins, the company’s downstream earnings were also boosted by a strong performance from its supply and trading business, which grew by more than 13% annually. Going forward, we expect BP’s downstream margin to continue to improve in the long run since the company is targeting significant efficiency improvements in its refinery business.

BP Continues To Focus On Cutting Costs

In the past few years, BP’s total capital expenditures have increased from around $18 billion in 2011 to almost $22.5 billion in 2014. [4] However, the recent decline in global crude oil prices has forced BP to increase its focus on optimizing both capital and operational costs in order to maximize its return in the current commodity down cycle. The company cut its capital spending by 17% to $18.7 billion in 2015. Looking ahead, BP expects capital expenditures to remain in the $17-19 billion range in 2016-2017, with the 2016 figure expected to come in at the lower end of the given range. The company also generated cash through divestment of assets worth $2.8 billion last year. [3] BP plans to earn $3-5 billion through divestments this year before returning to a divestment rate of around $2-3 billion from the next year onward. In addition to lower capital spending and divestments, the company is also targeting significant efficiency improvements in its operations. BP reduced controllable cash costs by $3.4 billion for the full year 2015 as compared to the prior year. [1]  The company plans to build on its cost cutting drive and expects to reduce annual cash costs by a further $3.6 billion by 2017.

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Notes:
  1. BP reports full year and 4Q 2015 results; dividend remains unchanged, February 2, 2016, BP Press Release [] []
  2. BP p.l.c. Group results Fourth quarter and full year 2015, February 2, 2016, BP Investor Relations [] []
  3. BP fourth quarter 2015 results presentation slides and script, February 2, 2016, BP Investor Relations [] []
  4. BP’s SEC Filings []