BP Plc (BP.) Ordinary US$0.25
HL comment (27 October 2020)
BP reported an underlying profit before tax of $1.2bn in the third quarter, compared to a $4.5bn profit in the same period last year and $7.4bn loss in the second quarter of this year.
The year-on-year decline in profits reflects the effect of lower oil prices and lower production in the upstream business, while downstream suffered from weak refining margins in fuel.
BP now believes it can breakeven on a cash basis at $42 a barrel for Brent crude.
The board announced a dividend of 5.25 cents per share for the quarter.
BP shares rose 2.2% 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.
Having cut the dividend by 50% at the half year stage the main order of business from here is getting the balance sheet back into good shape. Disposals and the issue of $12bn in hybrid-debt securities mean the group has made a good start. But a gearing ratio of 37.7% is still well above the 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 $44bn 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. As things stand the price of Brent crude is a little below the group's current breakeven point of $42. However, 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 group plans 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 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 at the cusp of what the group can really afford in our opinion, and until the oil price recovers it's going to bleed cash.
BP key facts
- 12 month forward Price/Earnings ratio: 13.9
- 10 year average 12 month forward Price/Earnings ratio: 12.0
- Prospective dividend yield (next 12 months): 8.5
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.
Third Quarter Results
Upstream reported underlying profits before tax of $878m in the third quarter, down from $2.1bn a year ago (although a big improvement on the $8.5bn loss last quarter).Total production fell 12.7% to 2.2 million barrels of oil equivalent per day (mboe/d), while average oil prices fell 31.4% to $38.17. Lower production is largely down to disposals in Alaska and Egypt, with underlying production down 3%.
The Downstream business reported underlying profits before tax of $636m, down from $1.9bn a year ago and $1.4bn last quarter. That was driven almost entirely buy an 84.6% year-on-year decline in profits from the fuels business, now at $222m. Refinery utilisation remains 10% below 2019 as the coronavirus pandemic negatively impacts demand, with refining margins at historical lows.
Organic capital expenditure, including maintenance and development activity, came in at $2.5bn, down from $3.9bn a year ago. Inorganic Capital expenditure of $1.1bn in the quarter was ahead of the $0.1bn spent in the same period last year - largely due to $1bn invested in the group's Indian fuels and mobility joint venture.
BP reported free cash flow in the quarter of $2.6bn, up from $2.1bn a year ago. That's down to lower organic capital expenditure, which more than offset weaker cash flow from operations.
Net debt at the end of the quarter stood at $40.4bn, down from $46.5bn a year ago and $40.9bn at the start of the quarter.
The outlook remains challenging, although the group expects oil & gas demand to continue its steady increase. Together with OPEC cuts that's expected to reduce inventories over time. The outlook for refining remains challenging.
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.
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