BP reported a 66 per cent drop in first-quarter earnings and higher debt levels as the collapse in oil demand and crude prices triggered by the coronavirus pandemic took its toll on the UK energy major’s finances.
The company said consumption of refined products had fallen dramatically in March, when governments around the world took more severe measures to curb the spread of the virus.
In the three months to March 31st, underlying replacement cost profits – BP’s definition of net income and the measure tracked most closely by analysts - were $791 million (€728 million), versus nearly $2.4 billion in the same period in 2019.
Consensus
While it beat consensus estimates at $710 million, shares in the company fell nearly 3 per cent in early trading on Tuesday.
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BP, which was confident about its ability to generate more cash at the start of the year, has been thrown into a fresh crisis just as a new chief executive has taken the helm of the company.
“The environment is brutal,” said Bernard Looney in an interview, adding the demand and supply shocks were on an unprecedented scale. BP, the chief executive said, was bolstering its finances and boosting liquidity to lower its break-even price - the level of profitability - to less than $35 a barrel, from $56 a barrel last year.
Lockdowns and travel bans to curb the spread of coronavirus have triggered an oil demand collapse, coinciding with a supply glut and causing an unprecedented crude price drop, forcing the entire sector into cash conservation mode.
On Tuesday morning Brent crude slid 4.3 per cent to $19 per barrel, having dropped below $20 a barrel last week for the first time in almost two decades.
BP was also hit by weaker earnings from its oil trading business as well as poorer performance from its stake in Russia's Rosneft. Cash flow slid to $1 billion in the quarter versus $5.3 billion last year.
It said there remains an “exceptional level of uncertainty” regarding the short-term outlook for prices and demand for refined products. It expects oil demand to fall by 16m barrels a day in the second quarter compared with pre-crisis levels.
Redundancies
Mr Looney said while BP did not plan on making any redundancies for three months, “there will be job cuts globally, towards the end of this year” with the pandemic accelerating a plan to drive down costs and reorganise the business under the new chief executive.
Gearing - which BP defines as net debt divided by the sum of net debt plus equity - rose to more than 36 per cent in the first quarter, one of the highest in the sector. The company said it will remain above its 20 to 30 per cent target range into 2021.
BP’s production in the quarter reached just short of 2.6 million barrels of oil equivalent a day.
Biraj Borkhataria at RBC Capital Markets said expectations of lower production volumes this year versus 2019, weaker refining margins as plants process less crude, and persistently low oil prices, will compound cash flow weakness.
“We therefore expect gearing to rise further through the year. The key question at this point is how far BP is willing to push the balance sheet in order to protect its dividend,” said Mr Borkhataria.
BP maintained its dividend of 10.50 cents a share for the quarter and, like many of its peers, is pulling on an array of financial levers to protect shareholder payouts.
BP has already announced it will cut capital spending to $12 billion, from initial expectations for $15 billion. The company is also deferring certain exploration and appraisal activities and aims to cut costs by $2.5 billion by the end of next year compared with 2019 levels. It has secured new credit lines and tapped the bond market for nearly $7 billion.
Last week Norway’s Equinor was the first major oil company to make a significant cut to its dividend. Mr Looney said BP will “review” the dividend decision in the second quarter.
Despite the company’s share price falling to a 24-year low last month, Mr Looney rejected suggestions BP will waver from its net zero emissions pledge because of the current crisis.
Patterns
“I don’t see the climate debate going away. . .[it] may be enhanced by what we’re seeing,” he said.
He added that new oil demand patterns could emerge out of the crisis as more people work remotely and travel differently. “There is a real question over whether consumers consume less,” he said.
BP said plans to raise $15 billion by mid-2021 from a huge divestment programme remained on track. However, it had warned some deals may take longer to close than initially anticipated. BP said on Monday the $5.6 billion sale of its Alaskan business will now close in June having modified the structure and “phasing of payments”.
BP is the first oil supermajor to report earnings with Royal Dutch Shell, ExxonMobil, Chevron and Total due in the coming days. – Copyright The Financial Times Limited 2020
