BP’s 3Q’16 Adjusted Earnings Improve; Company Aims To Have A Cash Balance Position By 2017

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Contrary to consensus expectations, BP Plc. (NYSE:BP), the London-based integrated oil major, posted a strong set of financial results for its September quarter 2016 on 1st November 2016 [1] on the back of higher price realizations. While the company missed its revenue estimate for the quarter, it exceeded the analyst forecast for 3Q’16 earnings by a large margin, driven by the cost savings realized by the company. However, due to the optimistic tone set by its counterparts, Chevron and Exxon Mobil, in their earnings last week, the market did not seem pleased with BP’s performance, causing the company’s stock to drop by more than 4% post the announcement of the results.

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Operational Highlights

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Driven by the recovery in commodity prices, particularly natural gas prices, the integrated company’s upstream revenues grew about 1.3% on a sequential basis, while it remained 16% lower compared to the same quarter of last year. However, this recovery in upstream revenue was more than offset by the impairment charges and other one-time charges, resulting in an adjusted loss of $224 million from its oil and gas operations.

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Further, BP’s downstream operations continued to remain weak because of shrinking refining margins throughout the industry. Even though the refining margins recovered in August and September, the global refining margin for the quarter averaged at $11.60 per barrel, compared to $13.80 per barrel in the last quarter, and $20.00 per barrel a year ago. As a result, BP’s downstream earnings dropped from $1.5 billion in the second quarter of this year to $1.4 billion in this quarter. These downstream operating profits were almost 40% lower in comparison to the third quarter of 2015. In addition, BP recognized $120 million as part of its share of Rosneft’s underlying net income for the third quarter, based on its preliminary estimates. This was notably lower compared to $380 million in the third quarter of 2015 and $250 million in the second quarter of 2016.

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On the cost side, BP has managed to reduce its cash costs by approximately $6.1 billion over the last seven quarters. Consequently, the company reported adjusted earnings of 30 cents, which is 30% higher on a quarter-on-quarter basis. Given the positive results of the austere cost reduction measures, the integrated company aims to further increase these cost savings to $7 billion by 2017. If successfully implemented, these cost savings will enable the company to improve its margins and earnings over the next year.

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Source: BP’s 3Q’16 Presentation

Cash Flow Position

In terms of the cash flow situation, BP continued to struggle to make its ends meet. Year-to-date, the company has generated $13.3 billion from its underlying operations and realized $2.7 billion from its divestment process. While the company restricted its capital expenditure budget and did not raise its dividend, its cash flows were not sufficient to fulfill its capital spending needs and dividend payments. In addition to this, the oil and gas major had to make payments of $5.1 billion for the Gulf of Mexico oil spill in the last nine months. This left the company with a deteriorating cash flow position at the end of the September quarter.

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Guidance Going Forward

For the near term, BP aims to keep its gearing ratio between 20% and 30%, by either reducing its long term obligations or improving its profitability, or both. Apart from the planned cost savings, BP has reduced its capital spending budget to roughly $16 billion for 2016, almost 36% lower compared to the peak capital spend of $25 billion in 2013. For the next year, the oil and gas giant targets to keep its capital expenditure in the range of $15 to $17 billion, leaning more towards the lower half of this range to improve its capital efficiency.

Further, by the end of 2016, the UK-based company expects to close asset sales of $3-$5 billion, which it plans to utilize to meet its Deepwater Horizon oil spill payments over the next few quarters. Thereafter, the company expects its divestments to realize $2-$3 billion per annum, in line with its historical trend. If all these efforts worked out as expected, BP is likely to enjoy a cash balance position by the end of 2017, assuming that the oil prices remain sticky in the $50 to $55 per barrel range. However, BP’s decision to maintain its quarterly dividend at 10 cents per share could work against its goal of balancing its cash flow position by 2017, if these efforts do not show results soon.

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Notes:
  1. BP Announces Third Quarter 2016 Results, 1st November 2016, www.bp.com []