BP’s Stock Drops After Missing 4Q’16 Earnings Estimate; To Restrict 2017 Capex To Improve Liquidity
Despite the spike in commodity prices in the last quarter of 2016, BP Plc. (NYSE:BP), one of the world’s largest integrated energy companies, posted an adjusted earnings of 13 cents per ADR for its December quarter, missing the analyst estimate by 3 cents per ADR((BP Announces December Quarter 2016 Results, 7th February 2017, www.bp.com)). That said, the London-based company reported a strong improvement in its 4Q’16 profitability compared to the previous year, driven by the surge in its top-line that was backed by the higher price realizations during the quarter. However, the market ignored the upswing in the oil and gas major’s performance for the quarter, and penalized the stock for missing the consensus target, similar to its US and European counterparts such as Exxon Mobil, Chevron, and Shell.
Operational Highlights
BP saw a jump in its upstream operations in the December quarter, owing to the recovery in commodity prices during the quarter. While the oil and gas company’s fourth quarter upstream production was down 5.5% compared to the same quarter of last year, it witnessed a rise in its price realization, which augmented its upstream revenues for the quarter. However, the better-than-expected performance from the upstream operations was partly offset by the weaker refining margins realized by the company during the quarter. Yet, BP managed to post 4Q’16 revenue of $52.1 billion, 6% higher on a year-on-year basis.
On the cost side, the London-based oil and gas producer outperformed its own target for the year. The energy company reduced its controllable cash costs by $7 billion versus 2014, a year ahead of schedule. As a result, the company experienced an increase in its operating income and margins for the quarter as well as for the full year 2016. For the December quarter, BP’s operating income stood at $1.1 billion, versus an operating loss of $3.6 billion in the same period of the prior year. However, the company booked a pre-tax charge, related to the Gulf of Mexico oil spill, of roughly $800 million for the fourth quarter, pulling down the company’s overall adjusted profits to only $400 million.
In terms of the cash flows, BP generated $17.8 billion from its operations during the year, much lower than $20 billion generated in 2015. In addition, the oil and gas major raised $3.2 billion from the proceeds of its divestment program in 2016. Thus, the company’s cash flows from operations coupled with the proceeds of its asset sales were sufficient to meet its capital expenditure of $16 billion and annual dividend of $4.6 billion for the year. However, the company had to pay $7.1 billion for the costs related to the oil spill, which weighed on the company’s cash flow position.
Going Forward
With the changing outlook for oil and gas prices, BP has made significant changes in its portfolio to enhance its future growth prospects. Over the last year, the company completed six major upstream projects that are likely to bring a notable growth in its free cash flows over the medium term. In terms of downstream operations, the European company rolled out the new Ultimate fuel range, which is expected to underpin material and reliable earnings growth in its marketing businesses. Apart from this, BP deepened its strategic interests in some oil and gas assets through new partnerships and joint ventures across the globe, while offloading its stake in some of its non-core assets. We believe these strategic changes to the company’s portfolio will boost its top-line as well as bottom-line and drive its value in the long term.
On the operational front, BP expects the commodity prices to gradually rebound in the coming quarters, augmenting the recovery of its upstream operations. As a result, the company foresees a sizeable growth in its upstream production in 2017. However, the company anticipates its downstream operations to remain weak due to lower refining margins and utilization. Accordingly, the oil and gas company will restrict its capital spending in the range of $16-$17 billion for 2017 and beyond. In terms of divestment, BP aims to close asset sales of $4.5-$5.5 billion over the next four quarters, and $2-$3 billion per annum thereafter. Additionally, the company expects a cash outlay of around $5 billion for the charges against the Deepwater Horizon oil spill in 2017, and roughly $2 billion thereafter.
Thus, we believe that with the estimation of the 2010 oil spill charges, BP is progressing well towards streamlining its portfolio to become cash neutral and leverage the revival in oil and gas prices over the next couple of years. However, the execution of its targets, along with the pace of recovery of the commodity markets, will play a crucial role in driving its future value.
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