BP Plc (BP.) Ordinary US$0.25
HL comment (4 August 2020)
BP reported an underlying loss of $6.7bn in the second quarter, compared to a $2.8bn profit in the same period last year. That largely reflects lower oil prices in the Upstream divisions - which extracts oil & gas.
That's before a $9.2bn write-down in the value of the group's assets as BP amended its long term oil price assumption - now expected to be between $50 and $60 per barrel out to 2050.
The group announced a quarterly dividend of 5.25 cents per share, down from 10.5 cents a year ago. The group aims to maintain the dividend at this level going forwards, with any additional surplus cash returned as a share buyback.
Alongside results BP announced ambitious plans to pivot the business to low carbon energy production in the years to come.
BP shares rose 6.1% in early trading.
The collapse in global economic activity caused by coronavirus has led to a corresponding nosedive in demand for oil and gas. Oil prices have been driven into the ground as a result, knocking billions off BP's profits and putting it firmly in the red.
We said at the end of the first quarter that sticking with the dividend in these conditions was a brave decision. As disruption has dragged on and long term expectations for oil prices shift downwards the group has bitten the bullet and cut the dividend by 50% at the half year.
The relatively high level of debt on the balance sheet made that cut all the more pressing. While the issue of $12bn in hybrid-debt securities has seen net debt fall quarter-on-quarter, the group's gearing ratio is still well above its long run target of 20-30%. Ultimately the group needs to generate significant free cash flow if it's to bring debt back into line.
Drastic cuts to capital expenditure should help ease the pressure for now, and $47bn of liquidity gives the group some breathing space. However, cutting investment now 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 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. While cost savings are something the group can influence, and it's doing just that with a target of breaking even at an oil price of $35 a barrel, without investment it's not enough to secure 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 group plans a twenty fold increase in renewable generating capacity, big increases in bio-fuel and hydrogen output, increased focus on its petrol station convenience offering and continued investment in electric vehicle charging. Meanwhile the carbon intensity of the groups remaining oil & gas assets will fall.
BP won't stop being an oil & gas company overnight, but the direction of travel is clear. Investing in renewables will be expensive though and in the short term will probably be a bit of a money pit. That could make the next few years tough for BP. Even the reduced dividend is more than the group can really afford and until the oil price recovers it's going to bleed cash. While there are some cost saving levers to pull, management really have little option but to batten down the hatches and weather the storm.
BP key facts
- Price/Earnings ratio: 24.5
- 10 year average Price/Earnings ratio: 11.7
- Prospective yield: 7.0%
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.
Half Year Results
Upstream reported an underlying loss of $8.5bn in the second quarter compared to a $3.4bn profit a year ago. Underlying production increased slightly, but average prices across both oil and gas fell 53.1%, with an average oil price received of $22.75. BP completed the sale of its Alaskan assets during the quarter and also agreed the sale of North Sea assets to Premier Oil.
The Downstream division reported underlying profits of $1.4bn, a 2.9% improvement on last year. The division benefited from a strong performance in fuels, with underlying profits up 34.8%, thanks to strong results in supply and trading. That more than offset weakness in Lubricants and Petrochemicals. BP is selling the Petrochemicals business to INEOS for $5bn.
BP's stake in Rosneft resulted in a $61m loss in the quarter compared to a $683m profit in Q2 2019. That's largely driven by lower oil prices.
BP's Alternative Energy companies continue to develop, with BP Lightsource in particular signing multiple new contracts.
Total capital expenditure fell 45.8% to $3.1bn. However, lower profits still meant free cash flow fell 42.3% to $670m.
Net debt at the end of the second quarter stood at $40.9bn, down by $10.5bn at the end of the first quarter. Gearing, which represents debt as proportion of total capital, fell from 36.2% at the end of the first quarter to 33.1% at the end of the second.
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 Thomson Reuters. 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.
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