Energy

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

If this is as good as it gets for BP in 2016, investors have cause to feel a touch underwhelmed. There weren't any big nasties in Tuesday's second-quarter earnings update -- adjusted replacement cost profit fell short of expectations but not shockingly so.

Still, it isn't possible yet to have full confidence in CEO Bob Dudley's plan to put the funding of the dividend on a sustainable footing and thereby prevent a further erosion of BP's balance sheet. That's unfortunate because while a recovery in the oil price has lifted BP shares, the stock lags behind rival Royal Dutch Shell. BP needs a catalyst but the second quarter didn't provide one.

Recovery Race
BP shares have performed well of late but Shell has fared better
Source: Bloomberg

Drawing a line under its Deepwater Horizon liabilities should help, of course. BP booked a $5.2 billion pretax charge related to the spill during the quarter, bringing the total to an eye-watering $61.6 billion. The one shred of comfort for investors, if you can call it that, is that the Macondo disaster prompted BP to start selling assets and cut costs before crude collapsed. Today, the company runs a relatively tight ship and gearing (the ratio of net debt to equity) is an elevated, yet manageable, 24.7 percent.

But unlike Shell, which completed the takeover of BG Group in January for about $52 billion, BP won't find it easy to sell a convincing growth story to investors -- even though it is trying. It has promised to add 500,000 barrels of oil equivalent of new production capacity by the end of next year, for example.

Little wonder that there's such focus on BP's plan to balance cash flows in 2017, which would mean it doesn't have to borrow to pay dividends. Unfortunately, the BP plan relies on oil reaching $50-55 per barrel, whereas Brent has recently fallen back below $45.

Refining margins have also deteriorated in recent weeks -- a worry for the sustainability of the downstream profits that have offset upstream difficulties in recent quarters. 

Downstream Doldrums
Refining margins improved in the second quarter but the recent trend has been discouraging
Source: BP
Nb. Shows refining marker margins - a generic indicator, not BP's actual results

The company is doing what it can, lowering capex guidance to below $17 billion for this year. But slashing spending further only increases skepticism about the company's long-term earnings. BP is out of intensive care but its rehabilitation could take time. There's a risk of a few relapses along the way. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net