The fourth quarter is shaping up to be one of the most painful in recent memory for the oil and gas industry. BP is the latest to post some pretty ugly financials for 2015, reporting a 91 percent decline in fourth quarter earnings as oil prices sunk to their lowest levels in more than a decade.
BP released its fourth quarter and full-year earnings on February 2, reporting a $6.5 billion loss for 2015, the worst result in decades. The British oil giant also said that it would slash another 3,000 people from its payroll by the end of 2017 from its refining unit, which comes on top of the 4,000 job cuts the company announced in January for its exploration and production division. BP’s share price plunged by more than 9.5 percent in the hours after it revealed its dismal figures.
The numbers were much worse for BP than analysts had anticipated. Expectations were for a 60 percent decline in fourth quarter earnings, while earnings actually slid by more than 90 percent. BP said that it would keep capex between $17 and $19 billion per year for the next two years, with spending coming in on the lower side of that range for 2016.
BP’s underlying cash flow of $20 billion does not cover the $19 billion in spending plus the $6.7 billion in dividend payouts. For now, BP is content taking on debt to cover the difference. BP’s “gearing” level, a measure of financial leverage, topped 21 percent, an increase from 16.7 percent in 2014. BP’s CEO Bob Dudley recently said that a gearing level rising to 25 percent would not make him “nervous.” Net debt jumped last year to $27.2 billion, up from $22.6 billion in 2014.
Higher debt raises concerns about the company’s creditworthiness, however. S&P put BP on watch for a possible credit downgrade. The ratings agency downgraded Shell by one notch, and also gave a negative outlook for BP, Eni, Total, Repsol, and Statoil. "We now believe many major oil and gas companies’ current and prospective core debt coverage metrics are likely to remain below our rating guidelines for two or three years as the industry adjusts to lower prices," S&P concluded in its latest report.
Another interesting tidbit from BP’s latest figures, which doesn’t augur well for the company in the near-term, was the fact that the oil giant’s downstream unit was no longer making up for the losses from the exploration side. Since the oil price downturn began a year and a half ago, the large integrated oil companies were buoyed by large refining margins that stemmed from higher demand for cheaper fuels, allowing the companies to better weather the crash in oil prices. BP’s 2015 refining earnings of $7.5 billion was double that of 2014 levels.
But that advantage is no longer as strong as it once was. BP’s refining earnings in the fourth quarter of $1.2 billion were largely in line with 2014 figures, but down 48 percent from the third quarter. That is largely due to the fact that refining margins in the U.S. have shrunk by half over the past year, and margins could be even lower in the first quarter of 2016 compared to the end of last year.
BP’s total market capitalization is now below $100 billion for the first time since the Gulf of Mexico oil spill, a disaster that cost the British oil company more than $50 billion to date.
Maintaining dividend payouts will be a question that continues to loom ever larger over the oil majors. They have long been the darling of investors because of the generous and ironclad payouts to shareholders, with most of the largest companies refusing to ever dial back dividend policies. BP reiterated its policy of maintaining its payout at 10 cents per share. “Unless it looks like it’s going to go down to $20, I think we are in good shape,” Dudley said. That will require the company to continue to sell off assets, reduce capex, and still take on more debt to cover the shortfall in cash flow.
But if oil prices remain depressed through this year, the pressure will grow on BP and its peers to look at its dividend. In perhaps a small sign of what might be to come, ExxonMobil, the most powerful and profitable oil supermajor, just cancelled its share buybacks for this quarter, which cost it $500 million in the fourth quarter.
While BP won’t face an existential crisis because of low oil prices, the longer crude prices remain depressed, the more the oil majors will be forced to retrench, shrink, cut spending, and sell off assets.
In the longer-term, dividends will eventually have to be cut, and production will fall off. But those are problems for another day.
By Nick Cunningham of Oilprice.com
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