Is BP a Good Bet for the Long Run?

BP (BP) announced second quarter ended June 30, 2016 total sales and other revenue from operations of $46.4 billion, up 21 percent sequentially from $38.5 billion in first quarter of 2016 but, down 25 percent year-over-year from $62.1 billion in second quarter of 2015.

BP declared second quarter of 2016 net loss of $1.39 billion or $0.46 of loss per diluted share compared to a net loss of $558 million or $0.19 of loss per diluted share in the sequential first quarter of 2016 and a year-over-year net loss of $5.78 billion or $1.91 of loss per diluted share in second quarter of 2015.

The global integrated oil and gas company reported continued year-over-year decline in both its top and bottom lines primarily due to the ongoing weaker global commodity demand and pricing environment coupled with the rising energy exploration and refining expenditures, eating into the company’s key margins.

What next?

Going forward, BP is consistently focused on minimizing its organic capital spending and it has achieved solid results since 2013, lowering the organic capital spending in the range of 30% to 40% till 2017.
Is BP a Good Bet for the Long Run?
Image by JirkaF / Pixabay
In addition, BP has also successfully achieved $7 billion of total cash costs reduction since the fiscal year 2014 and as of 2017 that together signifies notable operational excellence of the company which is keen on preserving cash while strategically investing into prospective company growth and offering attractive shareholder returns.

Considering the global macroeconomic environment, the worldwide oil demand growth is estimated to remain robust with some slowdown expected for the global energy supply, somewhat nullified by the ongoing Iranian production expansion. Importantly, the global crude price index, Brent, grew to $46 per barrel on an average for second quarter of 2016 as against $34 per barrel in the sequential first quarter while $62 per barrel reported in second quarter of 2015.

The slow but steady improvement in global energy price indices coupled with significant cost-optimization initiatives of BP are believed to support the company in emerging strongly from the ongoing global meltdown while allowing it to plan for strategic growth investments and delivering superior shareholder returns.

A look at the segments  

For the upstream segment, BP declared second quarter of 2016 adjusted replacement cost of $30 million compared to $500 million of net profit during the same period last year and $750 million of net loss during first quarter of 2016. The second quarter of 2016 upstream results compared to the same period last year results depicts weaker gas and liquids realizations, somewhat offset by smaller rig cancellation expenditures and key gains from superior efficiency  and highly simplified company activities. However, the sequential changes signifies improved liquids realizations, somewhat offset by greater exploration write-offs and weaker production, partially driven by periodic maintenance activities.

For the downstream segment, BP announced second quarter of 2016 adjusted fundamental replacement expense profit of $1.5 billion as against $1.8 billion during the first quarter of 2016 and $1.9 billion in second quarter of 2015. The second quarter of 2016 downstream results compared to the same period last year signifies a notably fragile refining scenario, somewhat offset by enhanced marketing performance of fuels and weaker costs from efficiency and simplification programs. However, the sequential changes are driven by notably greater turnaround activity and a smaller contribution from trading and supply, somewhat offset by robust margins of the refiner and impressive marketing performance of fuels.

BP is expected to continue to suffer top and bottom line losses over the longer term as the ongoing weaker global commodity demand and pricing situation is expected to continue with no any indications of near-term betterment.

Conclusion

Overall, the investors are advised to “Hold” their position in BP p.l.c. considering the company’s significant long-term growth prospects but, currently weaker global commodity demand and pricing environment coupled with a weaker financial position with significant total debt of $55.73 billion against smaller total cash position of $23.62 billion only, restricting the company to continue with its daily operations profitably. The profit margin of -2.76% also seems disappointing and indicate no profit but loss.
Published on Aug 19, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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