BP’s 3Q’16 Earnings To Be Weak Despite Improvement In Commodity Prices

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BP Plc. (NYSE:BP), the London-based integrated oil major, is slated to report its September quarter 2016 financial results on 1st November 2016 [1]. While the market expects the company to report a recovery in its revenues, backed by the rebound in commodity prices over the last three months, the company is likely to see a further contraction in its earnings. Since Exxon Mobil and Chevron, who reported their earnings last week, have set an optimistic tone for this quarter, BP’s weak results could be detrimental for its stock price.

BP-Q&A-3Q16

Commodity prices showed strong signs of recovery in the last three months. Henry Hub natural gas prices, a global benchmark for gas prices, recovered almost 35% in the third quarter, while crude oil prices remained flat during the same period. Given that BP has a significant presence in the natural gas market, the recovery in the gas prices is expected to result in an improvement in the company’s price realization, and, in turn, its top line growth in the quarter. However, commodity prices continue to be much lower compared to a year ago. As a result, the company’s revenue and earnings will be remain depressed compared to the last year.

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XOM-Q&A-3Q16-6

Source: US Energy Information Administration (EIA)

Since the onset of the downturn, BP has been consistently working towards reducing its operating costs to sustain its margins. Over the last four quarters, the company 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, to preserve its cash flows. We expect these cost savings to augment the company’s earnings in the third quarter, which could be offset by asset impairment or one-time charges.

BP-Q&A-2Q16-3

Source: BP’s 2Q’16 Earnings Presentation

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Notes:
  1. BP To Announce Third Quarter 2016 Results, www.bp.com []