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BP PLC (BP)
BP Profit Falls 64%, but Beats Expectations
BP, along with many other oil companies, pulled in some pretty strong numbers in 2008, aided by the high fuel prices at the time. And although gas prices have gone down, which tends to encourage an increase in consumer spending, the drop in prices is still consequential for the oil companies. Crude oil prices are approximately half what they were in 2008, making the comparison between the two years seem extreme. And indeed, when BP reported their first quarter profit today, the numbers were significantly less than last year. Despite the apparent change, how is the company faring when you consider the big-picture economic situation?
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For the first quarter 2009, BP had a profit of $2.56 billion; compared to last year's profit of $7.09 billion, this was a 64% decrease. Playing a large role in that decrease was the drop in the cost of oil, which fell from approximately $91 a barrel (and peaking over $110 a barrel) to $41 a barrel. Analysts were actually expecting profit to be even lower, around $2.3 billion, so BP managed to beat expectations. The figures are not surprising giving the circumstances; tomorrow, Royal Dutch Shell (RDS.B: Charts, News, Offers) is expected to announce a drop in profit very similar to BP.
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Instead of comparing this quarter to the year-ago quarter, you could also compare it to fourth quarter 2008. Just 3 months ago, the company actually reported a quarterly loss of $3.3 billion, as the company dealt with the quickly dropping oil prices. Beginning last year, the company realized that they had to cut costs, and take other measures to make sure that they were able to counteract the drop in oil prices. CEO Tony Hayward started programs which have helped cut costs by over $1 billion in this quarter alone. Furthermore, the company has been able to increase production, as demand has increased. BP raised oil and gas production by about 2.6%, which allowed them to reach production levels that they hadn't reached since 2006. This is a strong advantage for the company, as many of its competitors have announced that their output is decreasing.
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BP's future is still somewhat uncertain. The company is paying a dividend of 14 cents per share (up 4% from last year), but in order to pay this the company had to increase their net debt by approximately $3 billion. The company has indicated that they will need oil prices to remain around the $50-60 a barrel range in order to continue to fund its investments, and pay its dividend. The company has just announced that they will be cutting capital expenditures to a value at least below $20 billion, which they had previously said might be as high as $22 billion. Despite the uncertainties over the dividend, many analysts agree that BP seems to be staying ahead of the curve. They have managed to rebound quickly from the drop in oil prices, and have taken many appropriate steps. Investors have responded well to the news, which goes to show that it's all in how you look at the results.
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