Nobody likes poor earnings numbers. Or rather, no existing shareholders like poor earnings numbers. For those looking at potential investment, soft financials can either be a warning sign to avoid a stock, or a chance to buy the shares at a short-term lull. Following a 41% drop in Q3 earnings, the share price of oil giant BP (LSE: BP) may offer just such an opportunity.
Impairments and hurricanes
The key to assessing the true nature of an earnings report is often in the underlying cause of poor numbers rather than the figures themselves. BP saw its Q3 underlying replacement cost profits – effectively its measurement of net income – fall to $2.3bn, compared to $3.8bn the previous year, in the main due to falls in production on the back of Hurricane Barry in the Gulf of Mexico.
The numbers were also hit by a $2.6bn impairment charge after selling a number of US assets below their book value, another one-off problem so to speak, though the company did say lower oil prices were also to blame – a more fundamental issue.
That said, although earnings saw a large drop, the number still came in ahead of expectations – analysts predicting in the region of just $1.7bn. BP did warn that oil and gas production would be hit by about 100,000 barrels per day on the back of maintenance works because of “weather effects”, most notably the damage caused by July’s Hurricane Barry.
Oil and gas consolidation
For obvious reasons, the profits of oil firms generally rely on the price of oil itself. More than simply being able to sell their product at a higher price, certain thresholds can mean it is worth starting new projects, digging particular wells or operating in certain shale fields that a lower crude price simply makes pointless.
However it is, in fact, concerns over the price of natural gas that has been driving some of BP’s strategy of late. CFO Brian Gilvary said BP is “very bearish” on the price of natural gas through to 2021, which is why the company decided to sell its Alaskan business to Hilcorp for £5.6bn.
Worth investing in?
The one major concern is BP’s high debt levels following its $10bn acquisition of BHP’s shale assets in 2018. This latest report showed a gearing ratio of 32% in Q3, so anything the company can do to reduce this number will be well received.
Despite this, however, I still think BP has a strong investment case, particularly as an income stock. Yesterday the company confirmed it will be paying a 10.25 cents dividend, meaning an annual yield of about 6.2%. What’s more, the company has shown consistent dividend growth of almost 7% per annum over the past five years, meaning that for the long run we might expect to see dividends continue to stay attractive.
With this latest price dip, the company currently trades at about 14 times forward earnings, meaning it is a pretty good price, if not exactly cheap. Oil price fluctuations are certainly likely to translate to share price movements for the company, but over the long term, I think it is well worth considering.
