Weak Refining Margins And Depressed Commodity Prices Weigh Heavily On BP’s 2Q’16 Earnings

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  • BP Plc. (NYSE:BP), the London-based integrated oil major, posted a disappointing set of results for the June quarter 2016 on 26th July 2016,((BP Announces Second Quarter 2016 Results, 26th July 2016, www.bp.com)) despite the sharp recovery in commodity prices over the last three months. Since the company is amongst the first few integrated companies to report the second quarter earnings, it has set a gloomy tone for the other oil majors, who are slated to report over the next few days.

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  • The company missed the consensus expectations for both revenue and earnings, largely due to the unexpectedly weaker refining margins during the quarter. BP’s second quarter refining margins were the lowest since 2010.

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Source: BP’s 2Q’16 Presentation

  • The steep recovery in crude oil prices over the last quarter resulted in better realizations for the company. While the management believes that some of the factors disrupting the oil supply in 2Q’16 will reverse in the coming quarters, it expects the overall fundamentals of the market to bridge the gap between demand and supply in the second half of the year and beyond.
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  • However, due to the unfavorable impact of non-operating and fair value accounting items, the adjusted (or replacement cost) profit from the upstream operations fell drastically during the quarter. Also, BP expects its share of profits from Rosneft to be higher on a sequential basis.

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  • In order to survive the ongoing commodity downturn, the company has been consistently working towards reducing its operating costs. Over the last four quarters, BP has managed to bring down its cash costs by roughly $5.6 billion compared to 2014, and is on track to achieve its target of $7 billion reduction by 2017.  Also, the company has cut its capital spending budget by 30%-40% compared to its peak spending levels of 2013.

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  • Further, the oil major has finally managed to reasonably estimate the outstanding claims arising from the 2010 Deepwater Horizon accident and oil spill, and booked a pre-tax charge of $5.2 billion in the second quarter. This brings the cumulative pre-tax charge for the incident to $61.6 billion (before tax). Consequently, BP’s cash outflows for the quarter were notably higher than its cash inflows, despite the reduction in the its dividend and capital expenditure.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for BP

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