Demand for oil and gas recovers, but how the world’s economies rebuild from Covid-19 will be key for BP.
BP (LSE:BP.) has delivered the kind of positive quarter few had been expecting, which comes as a welcome relief for embattled investors.
An underlying replacement cost profit of $86 million (£66 million) was well in excess of the expected $120 million loss, and a significant improvement on the previous quarter’s loss of $2.3 billion.
The reported net loss of $450 million also compares favourably with a figure of $750 million from the year before and $17 billion in the previous quarter.
Recovering demand in oil and gas has certainly played its part, with a relatively stable oil price and the lack of write-offs also contributing to better fortunes. An average oil price for the period of $43 compares with BP’s own “cash balance point” of $42, with a longer-term breakeven target of $35 still in place.
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BP also continues to set its sights on both driving down costs and a significant divestment programme to ease the financial load. Around $2.5 billion of annual savings are targeted by the end of 2021, while the company is already approaching nearly half of its planned $25 billion divestment programme by 2025.
In the meantime, the move towards renewable or alternative energy continues, with an offshore wind and electric car charging presence likely to be the thin end of a long-term strategic wedge.
In addition, the company’s access to $44 billion of liquidity if required relieves some immediate pressure, and BP remains committed to the payment of a dividend. Even at these lower levels, an implied yield which comfortably exceeds 7% is a refreshing boost for income-starved investors, even if some of this relatively lofty figure results from the share price decline.
However, the company’s situation may be improving but it has not yet been solved.
Net debt showed a slight decline in the period but remains at an elevated level of more than $40 billion. The company is confident of reducing this figure further to around $35 billion in the near term, but much of this will depend on its ability to keep cash generation extremely high.
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At the same time, its gearing figure of 33% exceeds its stated target of between 20% and 30% by some margin. The recovery in demand has been levelling off more recently – in aviation, for example, the figure is still down 60% year on year.
The global economic recovery, as well as measures to address the supply and demand imbalance for oil, will be key factors in determining BP’s short-term direction.
The effects of the pandemic and an oil price weakened by this imbalance has had a significant impact on the performance of the shares.
Over the last year the price has declined by 61%, as compared to a drop of 21% for the wider FTSE 100. A year-to-date plunge of 57% underlines the more recent obstacles with which the company has been confronted.
Even so, the market consensus of the shares as a ‘buy’, while less emphatic than it has previously been, is testament to the longer-term optimism which BP engenders.
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