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BP - Profits up but conditions remain tough

George Salmon | 1 November 2016 | A A A
BP - Profits up but conditions remain tough

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BP Plc Ordinary US$0.25

Sell: 307.05 | Buy: 307.20 | Change -5.70 (-1.82%)
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Profits up but conditions remain tough

Shares in BP fell by 1.5% after the release of third quarter results. While profits beat expectations to come in at $933m, on an underlying replacement cost basis, this included a boost from a $164m tax advantage. $933m compares to $1,819m in Q315 and $720m for in Q216.

Our View

The oil price has risen in recent months after OPEC took action to limit supply, but with doubts over the cartel's strength and unity and the rise of shale in the US, it still averaged only $46 per barrel in Q3.

Primarily due to the disastrous impact of the Gulf of Mexico oil spill, BP started cutting costs and disposing of assets well before the oil price took a dive. The group has done an impressive job here, and while starting the process early may not have been a choice, trimming fat and reducing spending means that it is now in a healthier position than many rivals. The total cost of the spill will exceed $60bn, but a line has hopefully now been drawn under the bill for the disaster.

Even with lower costs and reduced capex, BP says that its cash breakeven oil price, the point where sources and uses of cash are in balance, is $50-55 per barrel. With current prices below $50, the $7.3bn a year payout is a burden for the group, and the dividend has recently been paid by taking on extra debt. Clearly not a viable long-term solution.

The shares currently offer a prospective yield of 6.6%. While we feel that BP is leaner and better placed to cope with lower oil prices than other in the sector, investors will still need the oil price to pick up before too long if the dividend is to be maintained.

Third quarter trading in detail:

Upstream - Despite costs being cut, BP made a loss of $224m before interest and tax on an underlying replacement cost (RC) basis, following a profit of £29m last quarter. The group say that lower liquids and gas realisations, contributed to the loss, as did higher rig cancellation costs and exploration write-offs.

Underlying production for the quarter decreased by 2.0%, however BP expect this to bounce back in Q4, reflecting the recovery from planned seasonal turnaround and maintenance activity.

Downstream - Q3 underlying RC profit before interest and tax of $1,431m is down from $1,513m in Q2. Within downstream, the Lubricants and Petrochemicals businesses put in an improved performance, but a significantly weaker refining environment in Fuels dragged overall profits down.

Rosneft - Adverse foreign exchange movements, lower oil prices and an increased government take saw underlying replacement cost profit before interest and tax for the third quarter drop to £120m, down from £246m in Q2.

The group continues to focus on lowering costs, and reducing capital expenditure. Q3 organic capital expenditure was $3.6bn, down from $4.3bn a year ago. BP again reduced expectations for 2016 organic capital expenditure, and it is now expected to total around $16bn, with a similar figure expected in 2017.

Net debt at 30 September 2016 was $32.4 billion, compared with $25.6 billion a year ago, although gearing remains within the company's targeted range.

With oil averaging $46 per barrel in the quarter, Brian Gilvary, BP's Chief Financial Officer said the group remains on track to rebalance organic cash flows next year at $50 to $55 a barrel, underpinned by continued strong operating reliability and momentum in resetting costs and capital spending.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.