BP’s profits crash after pandemic year

Oil major BP (BP.) reported another weak quarter in the final three months of 2020 even as oil prices recovered to over $50 (£37) a barrel, with earnings hit by lower margins and demand in its downstream business. The energy major’s overall numbers for 2020 were down on analyst expectations, with a replacement cost (RC) loss - BP’s preferred profit metric - of $18bn, compared to a $3.5bn profit in 2019. 

Upstream production was down 10 per cent on 2019 to 2.4m barrels of oil equivalent per day (boepd), at an average oil price of $38 per barrel (bbl). Upstream costs were down 7 per cent on 2019, the company said. 

BP crept into positive territory in the December quarter on the RC profit measure, however, reaching $115m, though this was well adrift of analyst expectations of $380m.

The group said the December quarter profit had been hit by “a significantly weaker result in gas marketing and trading and higher exploration write-offs”. Rosneft, the Russian oil company with which the company shares a joint venture, was the only bright spot in the quarter, registering an underlying RC profit of $311m, compared to consensus estimates of $170m. 

Jeffries analyst Giacomo Romeo said organic free cash falling into a $700m outflow was the “main reason for disappointment”, as consensus expectations pointed to a positive flow of $1.5bn. 

The quarterly dividend was maintained. But investors won’t see an uptick in the pay-out until the group gets net debt - excluding leases - down to $35bn, when buybacks will begin. Net debt was $39bn at the end of 2020, well down on the end of 2019 largely because of $12bn in hybrid debt issued during the year, which lands on the equity side of the balance sheet. Finance chief Murray Auchincloss said the $35bn target would likely be hit at the end of 2021 or start of 2022. This measure will likely climb in the first half of the year given redundancy payments and other one-offs.  

Looking beyond the numbers, chief executive Bernard Looney said 2020 had been a “pivotal” year for BP. It announced a major shift in spending strategy in 2020 that will see its production and carbon footprint come down, although underlying upstream production will grow in 2021, the company said on Tuesday. It will fall on a reported, or absolute, basis because of asset sales. The group is also around half way through its plan to cut around 10,000 jobs. 

Production commenced at four major projects in 2020, and the group sold off its petrochemicals business. It also completed the sale of its Alaskan assets. This divestment programme has already seen another major sale in 2021. BP announced this week it would sell 20 per cent of the Block 61 asset in Oman for $2.6bn, to Thai state company  PTT Exploration and ‎‎Production Public Company (PTTEP).

Mr Looney tried to assuage investor concerns over profits falling because of the new strategy. 

“We expect to grow Ebitda out to 2025,” he said on an investor call and expected higher margins, cost cuts and a “high-graded” portfolio would make this possible. 

The BP chief executive also said he was looking forward to working with new US president Joe Biden, who has promised to ban oil and gas leases on federal land. Mr Looney said this would affect less than 1 per cent of BP’s US holdings. The chief executive said licensing would come up for some Gulf of Mexico assets in a year or two. 

According to Jefferies, BP has the most recoverable pre-development reserves in the Gulf of Mexico of the majors, at around 800mbbls. Royal Dutch Shell (RDSB), which reports its 2020 numbers on Thursday, has just over 700mbbls, while Chevron (US:CVX) has around 600mbbls. 

US major Chevron (US:CVX) also reported its 2020 results in the past week, recording both a December quarter loss and full-year loss of $5.5bn. 

But the most market-shifting news came from a media report saying Chevron was in talks with Exxon-Mobil (US:XOM) about a merger, to the point of legal documents for a combination being drafted. Neither company confirmed or denied the Wall Street Journal report, which would create the world’s second largest energy company after Saudi Aramco (SA:2222). 

BP management acknowledged 2021 forecast numbers would be tough without knowing how the Covid-19 vaccine production rollout would go. What it can control is costs and where capital spending goes. So far under this management team the divestments and slow drip of final investment decisions shows Messrs Looney and Auchincloss are taking capital decisions very seriously. But this may clash with their ambitious renewables goals and earnings aims for the years to 2030. BP has come through a tough year and investors could be seeing added pay-outs by the end of 2021. There are certain positives here, but not enough to move off a sell rating at 260p. 

Last IC View: Sell, 263p, 2 Dec 2021