It’s not been a pretty quarter for BP but the oil major has managed to conjure up some better-than expected results. Shares are up over 3% in early trading. Decade-low oil prices and a warm winter that hobbled refining margins has meant an sharp decline in profits over the same period last year.

Brent crude oil price in the first quarter of 2015 averaged $54 per barrel, in Q1 2016 it was $36. Because of the downturn in crude oil prices, earnings before interest and tax (EBIT) in in BP’s upstream business have turned negative. ie drilling for oil has become a loss-making segment of the business. In the first quarter the upstream business made an adjusted a loss before interest and tax of -$747m.

The downstream business has been a saving-grace. Profits from refining oil had been expected to be more subdued this quarter because of pressure on refining cracks and margin indicators. The mild winter in the US and Europe meant lower demand for heating oil and diesel, creating stockpiles that have run over into the first quarter.

In fact the downstream business, which includes refining, reported profits of $1.8bn, up 49% from last quarter. Global refining margins sit at around $10.50 per barrel and every $1 drop in refining margins cuts BP’s pretax adjusted earnings by $500m per year. The downstream business looks to have  gotten a boost from BP’s trading arm, which appears to have called the rebound in oil correctly.

BP’s CEO Bob Dudley did call for a bottom in oil prices some time in Q1 and has been proven correct so far. The upturn in oil prices since mid-February have seen BP shares get a modest boost, making them a little over-valued compared to future earnings.

A dividend yield of 7% (above FTSE 100 and oil industry averages) suggests a concern that the dividend at current levels is unsustainable. BP expects to spend $17bn on capital expenditure this year and expects cash flows to even out as oil prices approach $55 per barrel. Should oil prices stay lower for longer, as Saudi Arabia’s Prince MbS appears to be positioning for, then BP will have to cut capex further to under $15bn. As an oil company, expenditure on new projects can only be cut back so far, if oil prices remain sub-$50 into 2017, the dividend of 10c per share will have to be pared back.

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