Interactive Investor

BP does well to break even

27th October 2015 14:25

Harriet Mann from interactive investor

With many companies still struggling to operate in a low oil price environment, news that BP will break even at $60 a barrel (bbl) in 2017 has been welcomed by the market. Although earnings slid further in the third quarter, BP's results were better than expected and, amid some more cost-cutting, BP has maintained its dividend in a boon for income investors.

Underlying replacement cash profit nearly halved from $3 billion last year to $1.8 billion in the third quarter, although this was $500 million higher than the previous three months thanks to a strong performance in its downstream business - refining crude oil and selling it - and smaller cash costs throughout the group.

BP has lowered its capital expenditure (capex) budget to $17-19 billion a year through to 2017, which is much smaller than the $24-26 billion earmarked a year ago. Controllable costs in the first nine months of the year are $3 billion lower than the previous period. By 2017 annual cash costs should be over $6 billion below 2014. BP is also nearing the end of its $10 billion divestment programme, with around $7.8 billion currently realised. During 2016 a further $3-$5 billion should be recognised, helping the group cope with oil price volatility and keep its US commitments. BP should return to a steadier annual $2-3 billion divestment programme thereafter.

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Third quarter operating cash flow of $5.2 billion took the total for the first nine months of the year to $13.3 billion, with $800 million pre-tax profit from its upstream business and $2.3 billion from its downstream division. Group profit of $46 million in the period wasn't enough to drag the group out of the red over nine months, however, as BP reported a loss of $3.2 billion.

Management have maintained the dividend, proposing a 10 cent per share pay out.

"Last year, we acted decisively to reset BP for a sustained period of lower oil prices and the results are coming through well. We are now in action to rebalance our financial framework in this new price environment," said chief executive Bob Dudley. "And I am confident that BP's strong and well-balanced portfolio of businesses and projects gives us the ability to grow value into the future. All of this underpins our strong priority of sustaining our dividend and then growing free cash flow and shareholder distributions over the long term."

Gearing of between 10-20% provides BP with the financial flexibility to manage the pay-outs related to its Gulf of Mexico oil spill, and as these uncertainties firm up the oil major wants to increase gearing to around 20%. Principle payments of up to $18.7 billion over a period of 18 years have now been agreed. A net pre-tax charge of $426 million was logged in the third quarter taking the nine-month total to $11.5 million.

After kissing $53 a barrel in early October, the price of each barrel of Brent Crude has crashed again to $47.39/bbl. BP's shares inched 1% higher to 388p on Tuesday, bouncing 20% from September lows of 319p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.