BP: Is It Making the Right Moves to Warrant a Buy?

When BP (BP) reported its third quarter 2015 results, it posted a replacement cost (RC) profit of $ 1,234 million, compared with $ 2,385 million a year ago. Further, on adjusting for certain extraordinary items, the company’s underlying replacement cost profit for the third quarter was $ 1,819 million, compared with $ 1.3 billion for the previous quarter and $ 3,037 million for the third quarter of 2014. The extraordinary items included non-operating items of $ 756 million and net favourable fair value accounting effects of $ 171 million (both on a post-tax basis).

At the upstream business, the company produced 2,242 MBOE per day i.e. 4.4 % higher than the third quarter of 2014 while for the first nine months; production was 2,220 MBOE per day i.e. 4.3 % higher than in the same period of 2014.
The underlying RC profit before interest and tax for the segment was $ 823 million compare to $ 3,899 million of last year third quarter.

At the downstream, the fuels business reported an underlying replacement cost profit before interest and tax of $ 1,917 million for the third quarter, compared with $ 1,078 million last year. From the lubricant business, the company earned $ 348 million in the third quarter, compared to $ 336 million in the same period last year. The petrochemicals business got impacted by a weaker environment in the last quarter and could report an underlying replacement cost profit before interest and tax of just $ 37 million compared to last year’s Q3 profit of $ 70 million. But the effects of lower costs from simplification and efficiency programmes and improved operational performance were clearly seen on the year to date numbers of the petrochemicals business resulting in an underlying RC profit of $ 130 million this year against a loss of $ 24 million last year for the YTD period.

Key Achievements:

The third quarter and the following month were full of some key achievements on the exploration and production front for BP plc. First, the company has been awarded five new blocks in the North Sea by the UK Oil and Gas Authority, taking the total number of licences awarded to BP in this licensing round to 12. Secondly, BP was also awarded three blocks in the shallow waters of the Mediterranean Sea in Egypt provisionally if the local government gives a nod. Further, Maersk Oil got approval for developing the Culzean field in the UK North Sea, a project in which BP has a 16 % interest. Another project of interest to BP (17 %) the Western Flank A project in offshore Western Australia started production in October.

Price and Outlook:

In the present commodity price environment, the results at upstream as well as downstream could be said to be close to expectations. An additional benefit to BP was that weather remained on its side in the Gulf of Mexico resulting in unhampered production at desired levels of efficiency. For the fourth quarter, BP expects a slightly higher production due to a potential recovery from planned seasonal turnaround activities. At the downstream however, the expectation is that refining margins will decrease and also the fuels business will suffer from low seasonal demand and margins. Therefore, in other words, we may see a decline in earnings in the fourth quarter.

The price of Brent Crude was down to$ 50 per barrel on an average from $ 62 per barrel in the second quarter. Even after all the efforts to cut production to match the slowly growing demand, the OPEC has been unable to curb the growth in inventories. To make matters worse, the Iranian oil is going to come into the market sometime in the next year. Thus, though some industry experts have declared oil to have troughed out, the recovery is going to be extremely slow especially when compared to previous projections.

Cash Conservation:

Realising this, BP is preparing to withstand the low price environment for longer than just near term. The company has been in the process of building a rebalanced portfolio since 2010 and has divested in as much as $ 75 billion of assets since then.

In the direction of conserving cash, BP has lowered its capital expenditure budget for 2017 to $ 17-19 billion from a previous range of $ 24-26 billion a year ago. BP has sold assets worth $ 7.8 billion over the year till now and is on track to complete $ 10 billion by year end thus providing the flexibility to sail through the rough waters. BP’s balance sheet is undoubtedly a strong one with $ 32 billion cash against $ 57.4 billion of total debt. The gearing ratio is 20 % and the company CFO believes that they “don't need to keep that level of cash balance going forward.”


All of BP’s fortunes in the stock market are a function of where the oil and gas prices head. Although BP is doing justice with its portfolio management tactics, it needs to show a sustainable earnings growth in order to keep investors bound to the stock. Thus while BP’s strong fundamentals are a necessary condition, it’s not sufficient before we see oil crossing $60 a barrel.
Published on Jan 13, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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