BP Slides To A $5.7bn Loss, As Demand Slides

The BP (LON:BP) share price hit its lowest levels since the mid 1990’s last year as a combination of a plunging oil price, and a reluctance to take difficult decisions eroded confidence in the company’s ability to manage the twin challenges of restructuring its business, for a greener world, as well as coping with the aftershocks of a global pandemic that destroyed short term demand.

We've seen a decent rebound in the BP share price since then, however the challenges facing the business have been laid bare for all to see over the last 12 months with the company slumping to a $5.7bn full year loss.

The challenges brought about by the pandemic forced BP to raise an extra $10bn in the form of a new revolving credit facility, as well as issuing $7bn in new bonds in April last year. This was then followed by a $15bn write-down in June, as well as announcing the loss of 10,000 jobs.

It was therefore no surprise that in August they were finally forced to accept the inevitable and cut the dividend in half, with the only surprise it took them so long to come around to that decision.

Soon after the shares fell to their lowest levels since the mid 1990’s, however we’ve seen a decent rebound since then, helped by a strong rebound in the oil price above its breakeven price of $42 a barrel, as the company under new CEO Bernard Looney embarked on a new “Performing while Transforming” strategy.

It finally appears that the penny has dropped that big capital expenditure in oil and gas exploration isn’t the way forward, with this particular part of the business of geologists and scientists in the exploration division seeing their numbers fall below 100.

As part of this evolving strategy, we’ve seen BP enter the offshore wind sector through a deal with Equinor ASA (OL:EQNR) in the US, which is expected to complete this year, and is quite timely given the new Biden administrations green agenda. BP is also looking to expand its Chargemaster business to deploy over 1,000 charging points for Police Scotland, while a deal was signed with Uber (NYSE:UBER) in September to give its drivers access to the Chargemaster network in London.

Its Lightsource business has also continued to expand acquiring the responsibility for a 1.06gw portfolio across Spain, from RIC Energy, while in China the company has partnered with DiDi to build electric vehicle charging infrastructure, with a view to setting up over 70,000 EV charging points by the end of the decade.

Looney has set an ambitious target of cutting output by 1m barrels a day over the next decade, as well as growing renewable energy output by a factor of 20. He is also looking at developing low carbon technologies for carbon capture and storage in an attempt to lower the company’s carbon footprint.

In Q3 the company posted a profit of $86m thus avoiding the first quarterly back-to-back loss in more than a decade, but it hasn’t disguised the challenges facing the industry.

Net debt levels were up at $40.4bn at the end of Q3, still on the high side, though the company is looking to get this down to $35bn with the help of further divestments.

We saw further progress on divestment front yesterday with the sale of a 20% stake in its Oman gas block program for $2.6bn, bringing net debt down in Q4 to £38.9bn, as replacement cost profits for Q4 came in at $115m.

This was well short of estimates of $440.3m, a miss that highlights how large the challenge of turning this company round is likely to be, over the next five to ten years.

On a full year basis, the total loss came to a rather hefty $5.7bn, compared to an almost $10bn profit a year ago.

The lack of progress on the debt front is also likely to continue to be a concern, in fact BP admitted that it is likely to increase in the first half of 2021, before starting to come back down again with a target of $4bn to $6bn of divestments this year, weighted towards the end of the year.

The rebound in the oil price to between $45 and $50 a barrel is BP’s working scenario around the net debt target, however that is only half the story. It’s all very well having a break-even price of $42 a barrel but if no one is buying your products due to low demand for refined products you have a problem, even if it is a short term one. For the upcoming quarter BP have acknowledged these challenges though they are hopeful that the vaccination program being rolled out across the world will see a recovery in demand in both oil and gas markets, helping to support prices.

On the subject of refining margins these are likely to remain under pressure, while Covid restrictions remain in place. January retail demand was down 20%, compared to a 11% decline in Q4.

The recent rebound in oil prices has certainly helped on the margin in Q4, however with demand low due to Covid restrictions and Q1 likely to be worse it means that any meaningful recovery isn’t likely to be visible until Q2 at the earliest.

The dividend was maintained at 5.25c a share.

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