BP: Will the Decline End?

Shares of BP (BP) lost approximately 6% of their value as the company reported weak financial numbers for its fourth-quarter results on February 2, 2016. The British company posted the biggest annual loss of $6.4 billion. Its replacement costs profits came in at $5.9 billion for the year, indicating a 51% drop as compared to the full year in 2014. The oil crash had to do with this decline in its net income that is over $60 a barrel less than it was in the same quarter of 2014.

What gives?

This significant decline in its replacement costs profit is due to the fact that BP experienced a weaker upstream environment.
The lower upstream realizations and lower supply and trading had a significant impact on its bottom line. The oil spill settlement at the Gulf of Mexico also weighed heavily on its earnings.

However, all was not bad for its upstream business, as the company resourcefully aligned its upstream business to the current market environment. Reduction of third-party spends coupled with rightsizing of the organization as well as cut backs in production costs helped the company to partially offset this decline in its upstream business.

Limiting capital expenditure and divesting non-core assets

BP made significant progress on capital spending. Its capital spend for the year came in at $18.7 billion, $4.2 billion less than its forecasted capital spend of $22.9 billion at the start of the year. Looking ahead, the company plans to further reduce its capital spends through 2017 to better withstand the low commodity price set up. It expects its capital spends to come in the range of $17 billion to $19 billion through 2017. In fact, BP expects its capital expenditure to be at the lower range of that stated in 2016.

In addition, BP has divested approximately $2.8 billion of non-core assets this year, including a $230 million in the fourth-quarter of 2015. In the past twenty-four months, the company has divested nearly $10 billion of its non-core assets. Going forward, it plans to divest a further $3 billion to $5 billion in 2016 and expects its divestment to average to their historical norms of around $2 billion to $3 billion per annum starting in 2017. The proceeds from these divestments will assist the company providing additional flexibility to remain competitive during this weak oil environment.


BP is taking various initiatives in order to remain competitive during this lower commodity price environment. It has right-sized its business and reduced its operating costs meaningfully. Also, it is investing in the downstream business that offers plenty of opportunities to benefit from during the low oil and gas prices.
Published on Apr 4, 2016
By Subhen Mittra

Copyrighted 2020. Content published with author's permission.

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