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BP share price: BP beats expectations, as downstream outperforms

BP share price: BP beats expectations, as downstream outperforms

The BP share price performance year to date has been disappointing when set against a benchmark of rising oil and gas production, and bumper profits for the UK oil giant.  

In the first half of this year a solid performance saw profits rise to $5.1bn, helped by increased production along with oil prices in Q2 rising to highs of over $70 a barrel. While average prices have been lower this year when compared to 2018 the production efficiencies of both upstream and downstream operations have helped push revenues to levels close to last year, when total revenues got to within touching distance of $300bn. Despite this narrative, the BP share price hasn’t performed as well as shareholders might have hoped.   

Today’s Q3 results and the BP share price

Today’s Q3 numbers weren’t expected to come in close to the levels seen in Q2, given the decline in oil prices seen since then. However, they still show a company that is nimbler and more efficient than it was a decade ago. Currently BP has breakeven prices of just below $50 a barrel, however the jury remains out as to whether buying BHP Billiton’s shale assets for $10bn was a wise move in the current environment. 

Expectations were for income to come in at $1.8bn, however the numbers came in well above that at $2.25bn, confounding expectations of a much weaker quarter, and though profits attributable to shareholders showed a quarterly loss of $700m, this was due to a tax charge of $2.6bn.

The $2.25bn number was still well below that of the $3.8bn of a year ago, given that oil prices are still below last year’s levels, but it would appear that better than expected downstream revenues have helped boost the numbers during the quarter. This outperformance was helped by record output at the Whiting and Cherry Point refineries. This helped offset a weaker upstream performance, which was impacted by adverse weather conditions in the Gulf of Mexico, and probably won't be repeated in Q4, putting the company on course for a fairly decent year. This may bode well for the BP share price later in the year. 

The departure of BP’s CEO 

This month’s news that Bob Dudley has decided to retire as CEO of BP at the end of this fiscal year, after 40 years with the company, is a neat way to bring the curtain down on an illustrious career. At the same time he completes the job of navigating the company through its darkest hour, in the wake of the 2010 Deepwater Horizon oil disaster, which saw the BP share price take a hit.

With Bob Dudley on his way out, new CEO Bernard Looney will have to oversee the challenges of potentially lower oil prices, as well as the ongoing transition to renewables, at a time when debt levels still remain uncomfortably high. It is here that we can probably see the reasons behind some of the BP share price underperformance.  

How is BP management addressing high debt levels?

Management have already started to take steps to address the high debt levels with the sale of the Alaska business to Hilcorp for $5.6bn, which should complete in 2020.

This is a welcome start for a company whose gearing is now at 31.7%, and significantly above that of a year ago when it was at 27.1%. BP is planning up to another $5bn of disposals over the next couple of months to bring the total divestment amount to $10bn by year end, and help bring it into line with the rest of the industry between 25% and 30%.

In terms of renewables, the company is already making strides, in July the company announced a new 50/50 joint venture with agricultural commodities company Bunge, to produce sugarcane ethanol in Brazil.

The company also has a 43% stake in Lightsource BP, which develops solar power, and which was purchased almost two years ago. Not only has it expanded its operations across Europe, as well as opening up in the US, Australia and Brazil, but it has also committed to spend $300m in investing in expanding in this particular area. 

BP also acquired the UK’s largest electric vehicle charging network, Chargemaster, just over a year ago, for £130m. This was a shrewd move for a company that has over 1,200 service stations around the country and may help the BP share price in the long run. 

The company also continued to make progress on its advanced mobility agenda, announcing an agreement with DiDi, to develop an electric vehicle charging network in China, the world's largest electrical vehicle market.

With renewables likely to become a growing part of the UK and the world’s energy needs, companies like BP have the financial clout to be able to deliver solutions quicker than governments. With awareness surrounding climate issues rising as a result of the antics of organisations like Extinction Rebellion, the oil majors need to show that they are at the forefront of climate solutions.  

Currently capital expenditure around renewables remains well below the levels allocated to big oil and gas projects. This needs to change, and it will be new CEO Bernard Looney’s problem as to how he goes about tackling the issue of transitioning away from fossil fuels towards renewables. How he navigates this issue will no doubt be reflected in the BP share price.


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