Like all oil companies, BP’s [BP.L] share price performance is at the mercy of oil prices. While the stock had started the year at 475.10p, as of the close of trading on 2 July shares had fallen 34.9% to 313.25p.
Despite the year-to-date fall, BP’s share price trades 34.04% above the 233.70p that it had bottomed out at during the market-sell off on 18 March.
The market crash marked a 24-year low for BP’s share price, making the COVID-19 sell-off worse than either the financial crash of 2008 or the Gulf of Mexico oil spill in 2010.
As for oil prices, Brent Crude and WTI Crude started the year at $66 and $61 a barrel, respectively, but plummeted following a price war between Russia and Saudi Arabia and after the coronavirus crisis hit.
As global trade and transportation were shutdown, leading to a decline in demand and a surplus in production facilities that were unable to shift the oil they had produced. Both Brent and WTI prices fell to record lows of $11.57 and $19.33 on 21 April as a result.
There were even concerns back in March and April that the price of Brent could drop further — below $10 a barrel — however, this didn’t happen. While the oil and gas industry is volatile by nature, the pandemic saw investors and traders flee big oil share prices, causing BP to announce a huge $13–$17.5bn write-off on 15 June.
The impairment charges suggest a long-term drop in the company’s share price and total value of assets. But Bernard Looney, CEO of BP is confident, saying “that these difficult decisions — rooted in our net-zero ambition and reaffirmed by the pandemic — will better enable us to compete through the energy transition”.
Is the pandemic the only thing dragging on energy demands and BP’s share price, or are there underlying issues?
Extraordinary times call for extraordinary measures
BP first acknowledged the impact of COVID-19 and the risk to its business in its first-quarter 2020 earnings report on 28 April.
Total revenues for the quarter was $59bn, a 17% year-over-year decrease on the previous quarter’s revenue of $72bn. Underlying replacement cost profit was $791m, compared to $2.3bn in the year-ago period. Net loss, meanwhile, was $4.4bn, of which $3.7bn was inventory that was worth substantially less after COVID-19 had impacted its value.
BP's total revenue for Q1 - a 17% YoY decrease
While it can be considered a good quarter given the circumstances, BP said it had plans to reduce operating costs by $2.5bn by the end of the year to cope with the slump in oil prices and demand.
On 8 June, the company announced that its plans to cut 10,000 jobs from its 70,000-strong global workforce. According to Looney, it currently costs $22bn a year to run the BP and $8bn of this is related to staffing and recruitment.
Number of jobs being cut from BP's workforce
BP had already set up a new $10bn revolving credit facility in a bid to shore up its position and to provide additional liquidity in April, and following its efforts to write down the value of its assets, it managed to raise nearly $12bn in hybrid bonds on 17 June.
These fundraising efforts are all part of a plan to shift to renewable energy and achieve net-zero carbon emissions by 2050, which have been accelerated by the pandemic. “The disruption of our everyday lives … has provided a glimpse of a cleaner, lower carbon world,” wrote Looney in his opening statement for BP’s 2020 Statistical Review of World Energy.
A potential downside to the industry speeding up plans to reduce carbon emissions, though, is that BP revised its forecast for oil prices down by 30% on 15 June. It now expects Brent crude to average $55 a barrel between 2021 and 2050.
In the short-term, there’s the distinct possibility that oil prices per barrel may fall again if there is a second wave of infections. The prices of oil will very much be dictated by transport restrictions.
Potential dividend cut?
Russ Mould, AJ Bell analyst, is of the opinion that the oil company’s recent plays might be an attempt to soften shareholders up for a possible dividend cut at the next quarterly earnings report in August.
“By laying bare the impact of the oil price crash on the business, slashing its oil price assumptions and taking tens of billions of dollars’ worth of write-downs, it is probably hoping any decision on the dividend will be seen in a more sympathetic light,” he wrote in a note to clients.
“By laying bare the impact of the oil price crash on the business, slashing its oil price assumptions and taking tens of billions of dollars’ worth of write-downs, it is probably hoping any decision on the dividend will be seen in a more sympathetic light” - Russ Mould, AJ Bell analyst
He added that the decision not to have cut its second-quarter dividend was already a strange one, particularly as its competitor Royal Dutch Shell [RDSA] was prepared to. Earlier this year, Royal Dutch Shell announced a two-thirds reduction of its dividends.
Any dividend cut could potentially lead to nervousness among BP investors but, all things considered, and with the share price fairly low, the stock could prove to be a worthwhile investment.
However, the long-term case for BP’s share price depends on how much the impairment charges and write-downs will have impacted BP’s second-quarter results, Tezcan Gecgil writes in the Motley Fool. She expects both the upstream and downstream parts of the business to have been affected.
|Operating Margin (TTM)||0.84%|
|Quarterly Revenue Growth (YoY)||-9.8%|
BP share price vitals, Yahoo Finance, 3 July 2020