BP returns to profit, sounds cautious outlook

Having finally bitten the bullet on a dividend cut in August, as well as posting a huge multibillion-dollar loss, and writing down future profit expectations on lower oil and gas prices, you would have thought that BP’s share price would have stabilised somewhat.

This hasn’t turned out to the case with the shares continuing to fall, over scepticism that CEO Bernard Looney’s turnaround plan can be successful.

Now over 30% down from those August levels, and at levels last seen in the mid 1990’s, BP isn’t alone in the share price declines being seen across the sector, though it is one of the biggest fallers.

It’s not just about BP, but big oil as a whole, where share prices have taken a battering, with sector peer Royal Dutch Shell’s share price also back at levels last seen in the mid 1990’s.

The reality for the likes of BP, and Shell who report later this week, is that doing nothing was not an option, the pity it’s taken respective managements so long to realise that drastic surgery to the business model was badly needed.

With oil prices unlikely to move much above $50 a barrel in the near future, and with a breakeven price now at $42, and the pandemic hollowing out demand, the drive towards renewables and other alternative sources of energy is now likely to speed up, and the reality is the investment required will need to be a lot higher than has traditionally been the norm.

It is also true that turning around a company of BP’s size and mind-set was always going to be akin to turning around a super tanker, which means investors may well have to wait quite a while longer for any form of payback.

This means it may also need to look at making further disposals, with questions needing to be posed about the future of its joint venture with Rosneft, in which it has a 20% stake and whether BP should look at moving away from its involvement there.

This morning’s Q3 adjusted net profit of $86m, may well be an improvement on the $6.7bn replacement cost loss posted in Q2 meaning the company has managed to avoid the first quarterly back to back loss in more than a decade, but it can’t disguise the challenges facing the industry.  

In Q2, BP’s trading division posted a decent quarter, however the performance seen in Q3 was always going to be a struggle to beat the outperformance in Q2, and so it has proved.

The weak refining environment has continued with the outlook set to remain challenging with Q4 reported production expected to be lower than Q3, though cashflow has improved, coming in at $5.3bn, due to better demand in Asia markets.

Net debt levels have come down from $40.9bn at the end of Q2 to $40.4bn as proceeds from divestments help bring this number down. BP says it is still looking to meet its target of $25bn of divestments by 2025, as well as meeting its net debt target of $35bn.  

Net debt is expected to continue to fall over the rest of the year, however gearing is still well above the 30% level normally considered to be the upper limit for the oil industry.

BP said it remains on target to meet its capex budget this year at $12bn, and expects 2021 capex to come in at the lower end of the $13bn to $15bn range.

In terms of its transformation agenda BP has agreed to enter the offshore wind sector through a deal with Equinor, which is expected to complete next year, and is also looking to expand its Chargemaster business to deploy over 1,000 charging points for Police Scotland.

While all of this is encouraging these are very much small ticket items, which means that their new Performing while transforming strategy is likely to require a lot more patience. The dividend was kept unchanged at 5.25c.