With its shares already having basked in a period of relative prosperity during the fourth quarter, BP (LSE: BP) announced today, among other things, a replacement cost profit (RC) performance that puts it on track to beat most analyst estimates for the full year.
This was because RC profit per share, BP’s regular non-GAAP measure of performance, came in at $0.30 for the year to date. Although considerably lower than for the same period of 2014, this is equivalent to just over 20.0p per share, which puts the group only a short distance away from the full-year consensus estimate of 22.06 p.
However, real GAAP eligible earnings were almost non-existent at 0.25 cents per share in the third quarter. This was after non-cash charges remained close to historic levels, while the group also charged another $426 million to the income statement to cover part of the settlement for the Gulf oil spill.
Earnings are down, but on track to beat estimates
Despite BP being on track to beat estimates, its earnings and performance across other key numbers are still heading south.
A key driver behind this has been the obvious reduction in oil prices, which has prompted a further sharp decline in average realised prices for the group during the third quarter — with the average realised liquids price now down from $91 in the Q3 2014 to just $44 for the most recent period.
This highlights the true extent of the challenges that BP will face during the coming quarters. As it stands, even without regular litigation costs, the group is barely profitable with oil at the above level.
Management says it will reduce costs by a further $6 billion in the coming years, which will aid the group in the longer term, but it still remains difficult to see where any growth will come from in the meantime.
This is while the group continues to pay out more in dividends than it earns from operations, which is fine while it is bringing in additional cash from disposals or divestment, but will soon become a problem later on if oil prices remain at or near to their current lows.
Chicken or the egg?
Asking which one will come first, a re-basing of BP’s dividend payments or a recovery in oil prices, is a bit like the chicken or the egg question.
There is no way that any of us can really know the answer to this, although if I had to make a call either way, I’d say that management will at least struggle to grow the dividend sustainably in the current environment.
This is while any true growth in the underlying business will probably remain highly contingent upon a recovery in prices, given the markedly reduced activity in exploration and reduced capex on production.
For these reasons, among others, I’m inclined to maintain my earlier position that the risks will probably continue to outweigh the potential rewards on offer for BP shareholders over the near term.
As for the longer-term investment case, with the ‘carbon footprints’ issue and what seems to be an ever increasing supply of crude pressuring BP and other oil producers from both sides, who really knows any more?
Just about the only thing that we can say with any certainty is that it’s highly unlikely the world is will be running out of oil any time soon!
