BP fighting to reduce costs

The group revealed a replacement cost (RC) loss of $2.23bn for the fourth quarter, against a loss of $969m for the comparable period in 2014. RC profits are based on how much it would cost BP to replace the reserves it sells. Excluding amounts linked to the Gulf of Mexico spill, operating cash flows in 2015 contracted by 38 per cent. The fall-away, though obviously severe, actually suggests that Bob Dudley and his team have already made headway on the cost front, but the group still announced an additional 3,000 job cuts.

BP, in common with industry peers, has been streamlining its operations in the face of the prolonged oil price slump. As a consequence the group has been forced to book heavy write-downs and restructuring charges; cumulative restructuring charges from the beginning of the fourth quarter of 2014 had reached $1.5bn by the end of 2015. A further $1bn in restructuring charges is expected this calendar year.

Though it’s understandable why the oil majors are undertaking some heavy-duty housekeeping, they will need to strike a balance between shoring up near-term cash flows and guaranteeing future revenue streams. Excluding the impact of acquisitions and disposals, BP’s reserves replenishment ratio, which shows the additional proved reserves relative to the amount of oil and gas produced, stood at a worryingly low 61 per cent. We see this as a temporary effect, as a return on this scale is obviously inadequate to support the group’s reserve base over the long term, but management needs to ensure that the aggregate effects of capital retrenchment don’t outweigh the near-term benefits – an overly defensive stance can be just as damaging as profligacy.

Prior to these figures JPMorgan Cazenove anticipated adjusted EPS of 27¢ for the 2016 financial year, down from 35¢ in FY2015.