BP Profit Slides on Weaker Refining, Oil-Production Loss

  • Exploration and production division posts $224 million loss
  • Reiterates aim to balance cash flow, spending at $50-$55 crude

What Do Shell, BP Earnings Say About Oil?

BP Plc reported a 49 percent decline in third-quarter earnings after crude prices fell, refining margins shrank and its exploration and production division posted a loss. Shares fell.

Profit adjusted for one-time items and inventory changes dropped to $933 million from $1.8 billion a year earlier, the London-based company said Tuesday in a statement. That beat the $719.2 million average estimate of 14 analysts surveyed by Bloomberg. The company’s exploration and production division lost $224 million compared with a profit of $823 million a year earlier.

“Overall trends in cost, capex savings and cash flows continues to head in the right direction,” Morgan Stanley analysts including Martijn Rats said in a note. “A 20 percent earnings beat was flattered by a one-time U.K. tax credit,” while exploration and production performance was weak.

For a quick wrap of analyst commentary today, click here.

BP’s earnings have fallen year-on-year for nine consecutive quarters, piling pressure on Chief Executive Officer Bob Dudley to rein in spending and sell assets without jeopardizing future growth. Oil’s rally following the Organization of Petroleum Exporting Countries’ September decision to cut output is fading and BP and its peers will need to continue cutting spending so they can maintain dividend payouts. The company will trim capital expenditure to about $16 billion this year, compared with a previous estimate of less than $17 billion.

Cash Flow

Brent averaged $46.99 a barrel in the quarter, down from $51.30 a year earlier and $47.03 in the prior three months. The decline that began in mid-2014 has forced explorers to delay projects, cancel billions of dollars of investments and eliminate thousands of jobs. Prices have increased about 7 percent since OPEC’s surprise U-turn in Algiers on Sept. 28. BP reiterated its aim of covering capital expenditure and dividends from cash flow at a price of $50 to $55 next year.

"We continue to make good progress in adapting to the challenging price and margin environment,” Chief Financial Officer Brian Gilvary said in the statement. "At the same time we are investing in the projects, businesses and options to deliver growth in the years ahead."

Oil and gas production fell 5.9 percent to 2.11 million barrels of oil equivalent a day in the period, the company said. Fourth-quarter output will be lower than the preceding three months, mainly due to planned maintenance.

The loss in BP’s exploration and production unit could weigh on investor sentiment, despite earnings being modestly ahead of expectations, Banco Santander SA analyst Jason Kenney said in a note. The performance in Russia was weak, while refining did better than anticipated, he said.

Shares of the company fell as much as 3.8 percent to 465.4 pence and traded at 472.8 pence at 10:55 a.m. in London. Royal Dutch Shell Plc, Europe’s largest energy company, gained as much as 4.2 percent after earnings exceededanalysts’ estimates.

Cutting Spending

BP is renegotiating contracts and reducing the size of projects to lower costs, and plans to maintain 75 percent of all cost cuts even when prices rise in the future. Organic capital expenditure for 2017 will be in the range of $15 billion to $17 billion.

Exxon Mobil Corp., the world’s biggest oil company by market value, said Oct. 28 its production sank to a seven-year low. The company warned it may be facing the biggest reserves revision in its history as it extended a run of profit declines. Chevron Corp. posted its first profit in a year though production fell short of expectations. While cost cuts helped Total SA beat estimates, Eni SpA reported wider-than-expected losses and Statoil ASA posted a surprise loss.

Weaker Refining

BP’s downstream earnings fell to $1.4 billion in the quarter from $2.3 billion a year earlier. Global refining margins averaged $11.60 a barrel in the period, 42 percent lower than a year earlier, according to the company’s website. Margins will remain under pressure this quarter, the company said.

While BP’s exploration and production business has struggled during the oil slump, the refining and marketing division helped buoy earnings over much of last year. Refineries benefited from the falling cost of crude while fuel demand rose, but that led to over-production and huge stockpiles that now can’t be absorbed.

BP and competitors including Royal Dutch Shell Plc will be hoping OPEC members reach a consensus on production cuts when they meet at the end of this month, to push up prices. Though cost cuts have helped large oil companies survive the market rout, many have amassed substantial debts to maintain dividend payments.

At the end of the third quarter, BP’s net borrowings totaled $32.4 billion, up from $25.6 billion a year earlier. Net debt to capital, also called gearing, was at 26 percent, compared with 20 percent previously, according to the statement. The company announced a quarterly dividend of 10 cents a share.

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