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Is the huge drop in third-quarter earnings at Britain’s BP an example of the old saw “the bigger they are, the harder they fall”? Or is BP’s very size, presumably achieved through shrewd practices, a reason that the British energy giant can withstand the harsh pressures of persistently oil and gas prices?
The price of Brent crude, for example, has hovered in the $50 range for most of the quarter, down from more than $110 in June 2014, and the price of gas was down about one-third as well. As a result, BP said, its earnings plunged by 40 percent from July through September.
The company’s profits fell to $1.8 billion in the period, down from $3 billion during the same period in 2014, and net profit fell to $46 million. Total revenue was $55.9 billion, compared with $94.8 billion in the same period a year earlier.
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Nevertheless, BP was big enough, and presumably smart enough, to beat the estimates of a group of 15 industry analysts questioned by Bloomberg, whose average expectations were profits of $1.26 billion. As a result, the initial reaction to the news on Oct. 27 raised the value of the company’s stock by 2 percent. And BP said its quarterly dividend of 10 cents a share would remain unchanged.
CEO Bob Dudley said the company’s performance was no accident. “Last year, we acted decisively to reset BP for a sustained period of lower oil prices and the results are coming through well,” he said in a statement. And he made it clear that the company is prepared for a protracted price slump. “We are now in action to rebalance our financial framework in this new price environment.”
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That means cutting costs further and raising increasing amounts of cash by reducing investments and selling off low-performing assets, respectively, through 2017. Dudley said BP can maintain its dividend “over the long term,” assuming, as he does, that the price of oil will rise modestly to $60 per barrel by 2017.
For the past year, Dudley has said there’s no way to know when the price of oil will rise to a more acceptable level, BP’s chief economist, Spencer Dale, wrote in a study published on Oct. 13. He wrote that “the principles and beliefs that served us well in the past are no longer as useful for analyzing the oil market.”
Once, there was concern that the world would one day run out of oil. But Dale noted that known global oil reserves have more than doubled since 1980 in a period when the demand for fossil fuels has declined because of concerns about their emissions. He concluded that “there is no longer a strong reason to expect the relative price of oil to increase over time.”
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Given that view, BP is continuing its spending cuts, a program that has saved the company $3 billion since Jan. 1.
Analysts are taking notice. One is Richard Hunter at the brokerage Hargreaves Lansdown in Bristol, England. “Refining margins are better than expected, the company remains a cash generating machine and costs are being attacked aggressively to suit the difficult backdrop,” he told BBC News. “BP’s longer term outlook remains positive.”
BP was the first of the world’s five largest oil companies not owned by a state to announce earnings for the third quarter. The other four are reporting later this week. They include Chevron and ExxonMobil, both American companies; the Anglo-Dutch giant Royal Dutch Shell, and Total of France.
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com