Can BP Survive the Downturn?

BP (BP) announced third quarter ended September 30, 2015 total sales of $54.7 billion, down 9.75 percent sequentially from $60.6 million in the second quarter of 2015 and down 41.7 percent year-over-year from $93.9 million in the third quarter of 2014.

BP p.l.c. declared third quarter of 2015 adjusted replacement cost profit of $2.74 billion, up 55 percent sequentially from $1.77 billion in the second quarter of 2015 and comparable to $2.75 billion of adjusted replacement cost profit in the third quarter of 2014.

The key energy company reported continued decline in its top line primarily due to the ongoing weaker global commodity demand and pricing environment coupled with the rising operational costs, negatively impacting the company’s key margins.

A weak end market  

The global crude pricing environment is still extremely weak with Brent oil index having averaged approximately $50 per barrel during the quarter, a decline from $62 per barrel during the second quarter and mainly driven by the ongoing enhanced OPEC production for the quarter which is notably higher than the average production in 2014 along with the expanding inventories and owing to the rising fear of the prospective Iranian production flooding the market during 2016.

The average Henry Hub gas price for third quarter of 2015 was $2.77 per million British Thermal Units, somewhat improved than second quarter pricing due to the power generation expansion in the US but, slow year-over-year production growth.
Importantly, the international Refining Marker Margin index recorded an average of $20 per barrel during the quarter which is believed to be the greatest level achieved in three years due to margin expansion and driven by solid gasoline demand.

Although, the increase in global per capita income of people has somewhat improved the energy demand still, the ongoing weaker global commodity pricing environment as depicted by the declining Brent, Henry Hub and Refining Marker Margin indices has greatly and negatively impacted the company’s margins for the quarter and beyond.

Non-renewable energy sources such as, oil and natural gas are believed to be the major energy providers globally with approximately 26% to 28% of total energy contribution from all the fossil fuels clustered together by 2035.

For the Upstream operations, BP recorded significantly reduced liquids and gas realization which was somewhat offset by solid gas trading and marketing results and reduced costs that includes the gains from generalization and efficiency actions. BP estimates fourth quarter of 2015 production to be somewhat higher compared to third quarter and primarily illustrating revival from targeted cyclic turnaround actions. For the Downstream operations, BP witnessed refining margins up-gradation and robust refining operations along with cost improvements from strategic simplification and greater efficiency programs. Moving ahead into the fourth quarter, BP estimates weaker seasonal demand and depressed refining margins to negatively impact fuels volumes and margins as against the third quarter.

Going forward, the global energy demand is believed to be primarily fuelled by the non-renewable energy resources and energy being mainly supplied by the energy companies such as, BP. Therefore, BP is expected to witness continued long-term growth through impressive upstream and downstream operations, serving the exploding global energy demand.


Overall, the investors are advised to “hold” their position in BP p.l.c. looking at significant room for company’s growth and an attractive PEG ratio of 1.70, comparable to the industry’s growth average of 0.60. However, BP needs to optimize its balance sheet with significant total debt of $57.40 billion against weaker total cash position of $31.95 billion only, restricting the company to make future growth investments. The profit margin of -3.11% seems disappointing and indicates no profit but loss.
Published on Jan 25, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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