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BP - disposals keep cash ticking over in pandemic slump

Nicholas Hyett, Equity Analyst | 2 February 2021 | A A A
BP - disposals keep cash ticking over in pandemic slump

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BP Plc Ordinary US$0.25

Sell: 318.85 | Buy: 319.10 | Change -27.10 (-7.86%)
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BP reported full year revenues of $183.5bn, down 35.1% year-on-year. That reflects the effect of lower production and lower oil prices on the Upstream business, and lower sales in Downstream as the pandemic affected demand for motor and aviation fuel.

Underlying profits fell from $10.0bn a year ago to a $5.7bn loss in 2020, as the revenue decline more than offset cost savings including 10,000 job losses.

The group announced a quarterly dividend of 5.25 US cents per share.

BP share fell 3.3% in early trading.

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Our View

The world still runs on oil & gas - with the most recently available data showing oil & gas accounting for over 50% of total energy sources in 2019. The suspension of economic activity caused by coronavirus and national lockdowns has led to a corresponding nosedive in demand for oil & gas products. Oil prices have collapsed as a result, knocking billions off BP's profits.

Lower prices mean lower revenues, which (despite the group's best efforts on cost savings) mean lower profits. Crucially, free cash flow - a measure of the money available to return to shareholders and pay debts - has also slumped into the red, with more cash leaving the business than coming in.

That led to a 50% cut in the dividend at the half year stage. Even at this reduced level, the dividend is at the cusp of what the group can really afford in our opinion.

Other than sustaining the dividend, getting the balance sheet back into good shape is the main order of business.

Disposals and the issue of $12bn in hybrid-debt means the group has made a start. But a gearing ratio of 36% (a measure of debt as a proportion of total assets) is still well above the long run target of 20-30%. Ultimately the group needs to generate significant positive free cash flow from the core business if it's to bring debt back into line.

Drastic cuts to capital expenditure should help ease the pressure for now, and $44bn of cash or easy to access debt facilities gives the group some breathing space. However, cutting investment up front endangers the long-term future - if new oil wells aren't brought online, eventually the group's fields will run dry. Longer term the group needs sustainably higher oil prices or lower operating costs, and ideally both, if the core Upstream business is going to get back into profit.

Unfortunately oil prices are outside the group's control. As things stand the price of Brent crude is comfortably above BP's current breakeven point of $42. However, it spent much of the last year considerably below that level, and the market remains volatile and unpredictable. Fortunately costs are something the group can influence, and it's doing just that with a target of moving the cash balancing point towards an oil price of $35 a barrel. Without investment though, that will not be enough to secure long term future growth.

$25bn of planned disposals between 2020 and 2025 won't make earnings growth any easier. However, BP plans to use the proceeds to fund a major step up in its low carbon energy investments, rising from $500m a year at present to $5bn a year by 2030.

The new strategy calls for a twenty-fold increase in renewable generating capacity, big increases in biofuel and hydrogen output, increased focus on its petrol station convenience offering and continued investment in electric vehicle charging. Meanwhile the carbon intensity of the group's remaining oil & gas assets will fall.

For all those efforts BP won't stop being an oil & gas company any time soon, and nor will the global energy mix be free of oil & gas products for years to come. The makes the oil price key to future success. Meanwhile investing in renewables will be expensive and in the short term will probably be a bit of a money pit. That could make the next few years tough for BP.

BP key facts

  • 12 month forward Price/Earnings ratio: 12.0
  • 10 year average 12 month forward Price/Earnings ratio: 12.2
  • Prospective dividend yield (next 12 months): 5.8

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full Year Results

The Upstream division, which discovers and produces oil & gas, saw full year profits fall from $11.2bn a year ago to a $5.0bn loss in 2020. That reflects a 9.9% decline in production volumes, with the average selling price of the division's products falling 30.8%. Lower production largely follows certain asset disposals, with underlying production volumes down 3.5% due to reduced capital expenditure and hurricanes in the Gulf of Mexico.

Underlying profit in the Downstream division fell 51.9% to $3.1bn. Overall refinery availability actually improved on last year, but throughput still fell slightly and reduced demand due to the pandemic meant refining margins nearly halved. The effect was particularly dramatic in fuels where underlying profits fell 57.2% to $2.0bn, with retail fuel sales down 14% and aviation fuel sales down 50%. January retail volumes were down 20%, compared to an 11% decline in the fourth quarter.

Rosneft's underling profits fell from $2.4bn a year ago to $56m in 2020. That largely reflects lower oil prices, together with some currency and tax headwinds. Other Businesses and Corporate, which includes all of BP's renewable energy activities, saw losses improve - from a $1.3bn loss last year to a $1.0bn loss this year.

BP reported full year operating cash flow of $12.2bn, with Gulf of Mexico payments of $1.6bn. Capital expenditure totalled $14bn, of which $2.0bn was spent on acquisitions and investments. As a result the group saw a free cash outflow of $144m in the half.

BP has now completed 50% of its planned $25bn of disposals by 2025, with divestment proceeds of $5.5bn during the year. That reflects the sale of BP's Petrochemical business to INEOS and Alaskan assets.

Net debt fell by $6.5bn year-on-year to $39bn, representing a gearing ratio of 36.0% compared to 35.3% a year ago. The group is on course to achieve its target of $35bn net debt by the end of 2021/start of 2022 (driven by organic cash flow and proceeds form disposals).

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 for more information.