BP Exceeds 1Q’17 Estimates; Focuses On Acquisitions And Partnerships To Expand Operations

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Having missed the market expectations in the last quarter, BP Plc. (NYSE:BP), much like its fellow integrated energy companies, posted a notable earnings surprise for both revenue as well as earnings for the March quarter 2017 earlier this week((BP Announces March Quarter 2017 Results, 2nd May 2017, www.bp.com)), driven by the improvement in commodity prices, coupled with the better-than-expected refining margins during the quarter. The London-based company posted adjusted income of over $1.5 billion, representing a remarkable improvement from a profit of around $500 million in the same quarter of last year. As a result of this earnings beat, the company’s stock surged around 1.5% on 2nd May, when the company announced its results. Based on the company’s recent acquisitions and partnerships, along with the improving operational performance, we figure that the company has managed to put the oil spill disaster of 2010 behind it, and is now moving on track to enhance its market value in the coming years.

See Our Complete Analysis For BP Plc. Here

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Key Highlights Of 1Q’17

Due to the implementation of production cuts by the OPEC in the first quarter of 2017, the global crude prices increased more than $19 a barrel versus the year ago quarter, and natural gas prices recovered nearly $1 per thousand cubic feet (Mcf) during the same period. In line with this global recovery in oil and gas prices, BP witnessed a sharp rise in its upstream price realizations for the quarter, resulting in a sizeable improvement in its upstream revenue. Further, the rise in oil prices encouraged the company to grow its liquids production by roughly 7% during the quarter. However, this was partly offset by the decline in the company’s gas production. Yet, the company’s overall hydrocarbon production increased by 3%, boosting its revenue for the quarter. Thus, overall BP’s 1Q’17 revenue came in at $56.4 billion, almost 44% higher compared to the same quarter of last year, and significantly more than the analyst estimate of $52 billion.BP-Q&A-1Q17-1

In terms of costs, BP did a decent job of restricting its operating costs in order to improve its profitability. The company’s efforts were further supported by the strong performance from the company’s downstream operations, driven by the better-than-expected refining margins during the quarter. Consequently, the oil and gas giant managed to post an operating income (GAAP) of $2.6 billion, as opposed to an operating loss of 425 billion in the year ago quarter.

On the financial front, however, BP registered a mixed performance. While the company’s cash flows from operations improved from $1.9 billion in 1Q’16 to $2.1 billion in the latest quarter, the company also raised additional debt of $3.7 billion during the quarter. An increase in the company’s net debt position is likely to weigh on its ability to repay its obligations. That said, the company continues to pay a quarterly cash dividend of $0.60 per ADR, despite its inability to meet this payment from its operational cash flows. This implies that returning value to the shareholders continues to be a priority for BP.

Sources & Uses of BP’s Cash Flows

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Going forward

Despite the volatility in the global markets, BP continues to believe that the commodity markets will rebalance in 2017, driven by steady global oil demand growth. That said, the company will continue to restrict its capital expenditure between $15-$17 billion in 2017 and beyond, depending on the recovery in commodity prices. Further, the company will stick to its divestment program, with an aim to close asset sales of around $5 billion in 2017, and $2-$3 billion in the remaining years of this decade. These deals will not only allow the company to streamline its portfolio but will also enable it to maintain its liquidity and fund its capital needs.

Guidance For 2017 And Beyond

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Apart from a strong operational performance in 1Q’17, BP had aggressively expanded its portfolio in the quarter by acquiring interests in some of the high quality oil and gas assets in Abu Dhabi, Western Africa, and Egypt. These transactions were aimed at leveraging the expected reversal in commodity prices in the forthcoming quarters, and enhancing the company’s long term growth prospects with the use of advanced technology and experience in the industry. Further, the company entered into a number of partnerships and joint ventures to not only compete with its competitors, but also to efficiently utilize its financial resources and execution capabilities which have been recently freed up from the claims of the 2010 oil spill. These include a strategic partnership with Woolworths Group in Australia, and a sales and purchase agreement with PTT Public Limited Company (PTT) in Thailand.

These high value acquisitions announced by BP over the last couple of months indicate that the company has come a long way since the 2010 oil spill disaster, and is now concentrating on growing its operations by investing in high potential and high return markets. Given the optimistic outlook for commodity markets, we believe that these deals provide a huge upside to the company, if it is able to effectively deliver on its plans. However, the pace of recovery in commodity prices will continue to play a crucial role in BP’s future value.

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