BP To Report Solid 4Q’16 Results Backed By Oil Price Recovery And Its Cost Cutting Measures
Like most of its contemporaries, the market is expecting BP Plc. (NYSE:BP), the London-based integrated energy company, to post a strong set of financial results for the December quarter and full year 2016 on 7th February 2017((BP To Announce December Quarter 2016 Results, www.bp.com)). This positive outlook of the market is driven by the rebound in commodity prices caused in anticipation of the production cut announced by the Organization of Petroleum Exporting Countries (OPEC) members during the quarter. While we expect to see a solid improvement in the oil and gas company’s earnings due to higher price realizations in the fourth quarter, it is highly likely that the company misses its consensus estimate for earnings, as has been the latest trend with most of the large oil and gas integrated companies, such as Exxon Mobil, Chevron, and Royal Dutch Shell.
The European energy company has regained almost 20% of its lost value in the last twelve months, primarily due to the recovery witnessed in the commodity markets due to the OPEC decision to cut its combined oil production by 1.2 million barrels per day (Mbpd) over the next few quarters. The commodity prices bounced back sharply during the quarter, with WTI crude oil prices rising more than 10% to $49.21 per barrel in the December quarter, and Henry Hub natural gas prices increasing by more than 30% to $3.71 per Mcf in the same period. Given this recovery in commodity prices, we expect to see a steep rise in BP’s upstream price realizations that will lift the company’s revenues for the quarter. However, the weak refining margins could weigh on the company’s top-line improvement.
Source: Google Finance; US Energy Information Administration (EIA)
On the cost side, BP has managed to reduce its cash costs by approximately $6.1 billion over the last seven quarters. In the December quarter too, we expect the company’s cost reduction measures to result in further cost savings, leading to an improvement in its operating margins. However, the company has finally estimated the total claims that it is liable to pay for the 2010 Deepwater Horizon oil spill. Consequently, we expect that the company would report some one-time charges related to these claims in the fourth quarter results, dragging down its bottom line notably.
Apart from the planned cost savings, BP is likely to spend roughly $16 billion on capital expenditure in 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. On the financial side, the UK-based company expects to close asset sales of $3-$5 billion by the end of 2016, and plans to utilize the proceeds to meet its oil spill payments. Going forward, the company expects to realize $2-$3 billion per annum from its divestment program, in line with its historical trend.
Apart from this, BP has finalized some meaningful deals across countries over the last two months in order to expand its operations and augment its future growth. In December 2016, the company announced a series of transactions to acquire interests in some of the high quality oil and gas assets in Abu Dhabi, Western Africa, Egypt, and Azerbaijan to strengthen its upstream operations and prepare for the recovery in the commodity markets (For More Details Read: BP Is On A Shopping Spree To Expand Its Operations).
In addition to this, the oil and gas major also declared a few agreements in the last week of 2016 that will support its downstream businesses, even in a weak price environment. These deals include the strategic partnership with the Woolworths Group to acquire, rebrand, and operate their existing 527 fuel and convenience sites across Australia, and 16 other sites (currently under construction), for a sum of $1.3 billion, and a sales and purchase agreement with PTT Public Limited Company (PTT), a fully integrated national petroleum and petrochemical company based in Thailand, under which it plans to supply approximately 1 million tons of LNG per annum to PTT for a term of 20 years (Also Read: BP Starts 2017 On An Optimistic Note).
These deals will not only enable BP to compete with its competitors, but also will allow it to efficiently utilize its financial resources and execution capabilities in the coming quarters.
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