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BP - Increased production and rising oil prices help profits up

Nicholas Hyett | 2 May 2017 | A A A
BP - Increased production and rising oil prices help profits up

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BP Plc Ordinary US$0.25

Sell: 507.20 | Buy: 507.40 | Change 2.60 (0.51%)
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BP announced a $1.5bn profit for the first quarter (Q116: $532m loss). The improvement was driven by higher oil prices and an increase in production versus the prior year. The dividend remains unchanged at 10 cents a share.

The shares rose 2.1% following the announcement.

Our View

Conditions for the oil industry have improved recently, with moves by OPEC to limit supply boosting oil prices. However, doubts about the cartel's unity and potential for increased US shale production, mean prices remain well below 2015 levels. As a result, the balance sheets of many producers are still under pressure.

Largely as a result of 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 voluntary, 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 costs should hopefully decline quickly from here.

With Deepwater Horizon finally fading into the past, BP's management now seem to have an eye on the future, with recent acquisitions improving the group's long term production potential. Cash flow should improve in the medium term as production ramps up.

However, these new projects will require increased investment in the near term. As a result the level at which it expects to match sources and uses of cash in 2017 has increased to $60 a barrel (from $50-$55 a barrel previously) - a levvel we haven't seen since July 2015.

The group's $7bn plus dividend is clearly a burden, with as much as a third being paid in shares, and debt continues to climb. Neither is a viable long-term solution, and with the shares currently offering a prospective yield of 6.9% the market is obviously nervous.

We feel that BP is making progress, and is certainly leaner, but investors still need the oil price to pick up if the dividend is to be maintained indefinitely without sacrificing future production.

First Quarter Results (Replacement Cost, RC, basis)

BP's Upstream division (Oil & Gas exploration and production) has driven this quarter's profit revival, with profits in the division hitting $1.3bn, compared to a $1.2bn loss in 2016. By comparison, profits in the Downstream business (which includes refining and sales) fell 9% to $1.7bn.

Upstream produced 3,530mboe/d in the quarter, up 5% on a year previously. Excluding the stake in Rosneft, production was 2,388m/boed, up 3% on 2016. Cost per unit of production fell 13% to $7.22/boe. BP's Upstream major project programme is on track to provide 800,000boe/d of new production by 2020.

In Downstream, retail volumes increasing year-on-year and the group added more than 30 new convenience partnership sites in the quarter. BP opened its first retail fuels site in Mexico and has plans to grow the network to around 1,500 sites in the next five years. Manufacturing operations remained strong, with Solomon refining availability of 95.2% and the petrochemicals business completed the upgrade of the Cooper River PTA plant in the US.

Payments related to the Gulf of Mexico oil spill totalled $2.3bn in the quarter, and are expected to total between $4.5bn and $5.5bn for the year. Excluding these payments, operating cash flow for the first quarter rose $1.4bn to $4.4bn.

Total capital expenditure in the quarter was $4.1bn, down $0.4bn on 2016, with the group targeting organic capital expenditure of $15-17bn for 2017. BP completed disposals worth $0.3bn in Q1, and agreed the $1.7bn sale of its interest in the SECCO petrochemical joint venture after period end, subject to regulatory approval. BP continues to target total divestments of $4.5-5.5bn in 2017.

Net debt at the end of the quarter was $8.6bn higher than a year ago, at $38.6bn, with gearing increasing to 28% (Q116: 23.6%) - although this remains within the 20-30% target range.

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.

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