Equity Research; BP
BP Q4 and FY2016
There are a number of pointers in these results:-
- FY2016 (financial year 2016) underlying replacement cost profit of $2.58bn. This is an earnings miss as the profit consensus was around $2.75bn. Including exceptional items BP lost $999m in 2016.
- FY2016 saw a positive reserve replacement ratio of 109% (BP added 9% more to oil reserves than it produced).
- FY2016 BP achieved $7bn of cost savings vs its 2014 objective whilst capital spending fell to $16bn below its $17bn-$18bn target reflecting savings from offshore operations and oil service costs.
- BP oil production fell 0.5% to 2.2m boepd (barrels of oil equivalent per day – broadly equating to oil plus gas sales) – BP has guided to expect higher production in FY2017 but has not identified the expected production growth.
- Q4 underlying replacement cost profit of just $400m v $933m in Q3 2016; notwithstanding strong crude prices over Q4 2016. Whilst higher crude oil prices in H2 2016 helped, the drop in refining margins had a bigger offsetting impact, downstream profits fell c.$2bn for BP.
- Rosneft underlying profits declined to $567m from $1.31bn – reflecting its higher cost structure.
- Cashflow from operations declined sharply over 2016 to $10.7bn v $19.1bn in 2015. This is relatively weak and comes despite charges for Macondo falling from $11.7bn in 2015 to $4.48bn in 2016.
- Considerable clarity on BP’s expectations for further Gulf spill costs/ settlements, which are expected at $4.5bn-$5.5bn in FY017, at $2bn in FY2018 and just over $1bn in FY2019.
- BP gearing ended at 26.8% (FY2015 21.6%) with net debt up $8.3bn at $35.5bn v $27.2bn end 2015.
Conclusion
For FY2016 BP “borrowed” its 40 cent dividend payout; it added $8.3bn in more debt. Mortgaging the company to pay shareholders is not sustainable, there will come a time when BP will have to rebase the dividend.
It is hard to escape the conclusion that BP needs further substantial gains in crude oil (FY2016 average $38.27/barrel) and gas prices ($2.84/ mcf (million cubic feet) v $3.80 (FY2015)) to get close to net cash generation. A $60 price is required to arrest BP’s debt accumulation however crude prices have stalled at $50-$53/ bbl.
We are concerned that FY2017 BP’s oil production growth is likely to be very low single digit and BP may embark on acquisitions to compensate (like Shell/ BG). An acquisition might be well received if the right partner at the right price is found. BP’s valuation has dropped 11.5p or £2.2bn broadly reflecting the lower profit/ higher debt load combination (BP’s higher debt is worth 34p per share). An earnings miss is important and likely to lead to profit downgrades.