BP 8217 s path to improvement looks intact

BP produced a small figurative quarterly profit ($72m) for the fourth quarter, as widely forecast, and a profit for the year which is 40% lower than consensus forecasts. Unfortunately, it is not the group’s only negative surprise in the final quarter, including a break even oil price hike to $60bbl a barrel from $50-$55.  Additionally, there were unexpected additional costs at the margin and production edged below 2015 volumes, pointing to profitability and competitive impact, with prices up by a quarter since February 2016.

The apparent slippage across the group’s recuperating metrics and operations is capping the shares on Tuesday, with the sentiment possibly compounded as the revival story across the sector takes a hit. BP is the latest major to report that it missed earnings forecasts in the final quarter of 2016.

There is, of course, another way of interpreting this trend in the global oil company earnings season. True, a touch of the end of empire accounts for some of Exxon’s profit coming in light of expectations. But at BP, perhaps even more than for Chevron and Shell, messy earnings do not quite disguise adroit opportunism.

Few supermajors would have hazarded a breakeven oil price estimate hike during most of the last year, for obvious reasons. Now, with the Saudi Aramco coming to market in 2018, and OPEC firming up the ground with supply cuts, even signs that U.S. shale producers are lengthening the glut have not capped the ascent of prices over the last year. These are better conditions to make moves that would have made investors restive during 2015/16.
In that light, for BP, the booking of $328m million in one-off charges, including a non-cash charge to discount ongoing provisions, looks like moderate kitchen sinking. The full-year profit miss ($400m vs. market forecasts for $560m) is also barely a surprise. The shares have almost erased a 4% spike lower on Tuesday.

A 0.5% decline in production is also arguably negative, though again, is not quite a shock after $10bn-plus of asset sales during 2014-2016, albeit mostly non-core. Nevertheless, 2016, now looks like the nadir in production, as much as it does for planned capex.

BP’s 8 major projects in the works are the most it has taken on in a single year, aiming to ramp production by 800,000 barrels a day by 2020, with obvious revenue improvement, even assuming no further oil price appreciation and using BP’s own long-term forecast of transportation demand growth of just 1 million barrels of oil per annum. Nearer term, the Rosneft stake controls sizeable reserves and production with growth potential when Russia’s investment environment stabilises.

Few investors will have looked past the potential impact of BP’s 2016 on the dividend, though. At $6.7bn in 2015 it accounted for 37% of funds from operations, though the group’s commitment to no less than that is undaunted. As per profit prospects, conditions for the pay-out to improve look less than ideal, though the path to improvement is intact.