BP facing ‘exceptional level of uncertainty’ due to COVID-19 pandemic

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Oil giant BP has today announced that its first-quarter profits have fallen by more than two-thirds after the global coronavirus crisis has further decimated the industry.

The oil giant warned it was facing an ‘exceptional level of uncertainty’ due to the troubles facing oil production and storage.

Lockdowns around the world have been keeping people inside, slashing demand for oil across the world. Last week, US oil prices turned negative for the first time in history.

Total first quarter revenue fell 11.7% year-on-year to $59.5bn. That reflects a 2.8% decline in group production, 15.9% decline in average oil prices and reduced demand in downstream. Underlying profits in the first quarter fell 66.5% to $791m.

The group announced a quarterly dividend of 10.5 cents per share, up 2.4% year-on-year.

The shares fell 2.2% in early trading.

BP CEO Bernard Looney said: “Our industry has been hit by supply and demand shocks on a scale never seen before, but that is no excuse to turn inward. We are focusing our efforts on protecting our people, supporting our communities and strengthening our finances. We are determined to perform with purpose and remain committed to delivering our net zero [emissions by 2050] ambition.”

Industry reaction

Nicholas Hyett, Equity Analyst at Hargreaves Lansdown

BP has stuck with its dividend despite the turmoil currently wracking oil markets. However that’s coming at significant cost.

Net debt shot up some $6bn this quarter and the group’s upper gearing limit is rapidly disappearing into the rear-view mirror. Negative free cash flow means the balance sheet would be deteriorating even without the dividend, and with a sizeable expense related to the Gulf of Mexico oil spill expected next quarter, things look set to get worse before they get better.

Some drastic cuts to capital expenditure should help ease the pressure for now, and $32bn of liquidity gives the group some breathing space, but longer term the group needs higher oil prices or lower operating costs, and ideally both. Oil prices are outside the group’s control, and with demand for fuel at BP’s petrol stations down 50% and aviation fuel demand down 80% it’s anyone’s guess how long they will take to normalise. However, operating costs are something the group can influence.

BP’s aiming for $35 oil breakeven. That’s still some way above where the oil price is now, but the closer to that level BP can get the longer its existing liquidity will last and the better its chances of making it out the other side of this crisis without the all-important dividend needing a haircut.

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