BP's share price: what to expect in Q2 earnings

BP's [BP] share price is down circa 40% so far this year, and things could get worse before they get better for the oil giant’s stock. Rock-bottom oil prices and the coronavirus are both likely to affect BP’s second-quarter results.

That said, a tentatively resurgent oil market and divestment plans could offset some of the expected losses. Will this be enough to restore investor confidence, or will BP’s share price come under more pressure following Q2 results?

When does BP announce Q2 earnings?

4 August

What could move BP's share price post-earnings?

Impact of oil prices on BP’s share price

Oil markets have seen historic lows in 2020’s second quarter. In April, West Texas Intermediate (WTI) futures fell below zero, trading in negative territory for the first time, while a barrel of Brent was trading at $19.33 on 21 April, having started the year at circa $61 a barrel.

Since then, however, OPEC production cuts and a decline in US output have driven prices back up. According to data from Oilprice.com, WTI ended the week trading at $40.57, and Brent at $43.52.

This is good news for BP’s share price, and the oil giant will be hoping to avoid the hammering it received in the first quarter due to falling oil prices. Those results saw underlying replacement cost profit — a proxy for net profit — come in at $0.8bn, down from $2.4bn in the same quarter last year. 

Inventory holdings losses came in at $3.7bn — a figure BP said was "a result of the dramatic drop in oil prices at the quarter-end". Worse still is that BP expects demand to be weak in the second quarter compared to last year:

“Demand in the second quarter, we think, will be down around 16 million barrels per day worldwide this year. And that’s about five times the previous demand destruction which we saw in the global financial crisis in 2008 to 2009,” said BP’s CEO Bernard Looney at the time.

How much demand has really suffered will go a long way in determining whether BP's share price rises or falls post-earnings.

“Demand in the second quarter, we think, will be down around 16 million barrels per day worldwide this year. And that’s about five times the previous demand destruction which we saw in the global financial crisis in 2008 to 2009” - BP’s CEO Bernard Looney

Divesting to cut costs

One area to watch out for is costs. In the first quarter, BP’s net debt had risen to $51.4bn, a $6bn quarter-on-quarter rise.

"We are taking decisive actions to strengthen our finances — reinforcing liquidity, rapidly reducing spending and costs, driving our cash balance point lower," Looney has said. 

BP is doing this is by divesting itself of expensive assets, amongst other things. Last month, BP sold its Prudhoe Bay oil and gas producing fields to Hilcorp Energy, ending its decades-long stint as top-producer in the area.

“We are taking decisive actions to strengthen our finances — reinforcing liquidity, rapidly reducing spending and costs, driving our cash balance point lower” - Bernard Looney

What makes the deal remarkable is that BP lent Hilcorp the $5.6bn needed to complete the sale. As BP's market cap stood at $73bn on 2 August, the loan represents a significant percentage of its capital. The deal will see Hilcorp pay $4bn to BP over a set timeframe, with the remaining $1.6bn being sourced from future earnings.

Why has BP done this? In short, Alaskan oil and gas production is expensive, compared with fracking in the Permian basin. Offloading operations like Prudhoe Bay could see BP become a more efficient operation. Last quarter, BP's receipts from divestments came in at $0.7bn. Shareholders should keep an eye on this figure to gauge how successfully the company is reducing costs.

Is BP’s share price a bargain right now?

For income-seeking investors, the stock paid a decent $0.105 dividend per share last quarter. Considering a lot of companies are cutting dividends right now, this is no mean feat. 

Still, oil prices remain volatile and the recent resurgence could always go into reverse. Both are factors that traders should consider before buying BP ahead of second-quarter earnings. 

Looking at previous results, BP missed analyst earnings expectations last quarter, which saw its share price dip over 5% in the subsequent two days of trading. Another miss could see BP’s share price fall again post-earnings, but if oil markets remain robust then losses could be recouped.

BP's share price has a 347.59p average price target from the analysts covering the stock on the Financial Times. Hitting this would see a 26.3% upside on BP’s share price through 31 July’s close.

BP share price vitals, Yahoo Finance, 3 August 2020