BP’s Quarterly “Profit” May Not Be What It Seems

BP reported an underlying net profit of $532 million for the first quarter of the year and its shares immediately jumped on the London Stock Exchange, but math can be subjective depending on which figures you plug into which equation.

The $532 million profit was certainly much better than a loss of $140 million projected by analysts—even though the analyst consensus figure was provided by the company itself, rather than by an outside agency.

Here’s where it gets a bit muddled. BP, like other oil companies, uses cost-profit as its net profit metric replacement. For the first quarter of 2016, the underlying figure excluded charges related to the Gulf of Mexico oil spill from 2010 as well as other adjustments. Taking these into account, its actual first-quarter net result was a negative $485 million.

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An optimistic investor would wave this away, focusing instead on the core result, which reflects the performance of BP’s business on an as-usual basis. The problem with such a cheerful attitude is that BP is not done paying for the 2010 disaster. Right now, it is being sued by victims of the spill in class-action and civil suits, and by shareholders who bought BP stock in the days after the spill and now claim the company wasn’t honest with them about the extent of the disaster.

In short, the story is far from over.

In this latest reporting quarter, expenses relating to the spill made up the bulk of an $896-million charge BP booked in the report, compared with a similar charge of just $341 million for the same period last year.

Spill-related costs, in other words, are continuing to accumulate, so far at over $56 billion and the end nowhere in sight, according to lawyers who talked to the Wall Street Journal.

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BP had a net debt of $30 billion at the end of the quarter and net cash of $3 billion--again excluding spill-related charges. With these, net cash was $1.9 billion. The company said it will cut its capex for the year to $17 billion and possibly to $15 billion in 2017 if the price depression persists. All in all, the underlying profit it reported for the period was made possible by the positive performance of its downstream business, which offset the loss-making E&P segment.

The situation is pretty much the same with its peers. Except, of course, that none of them has to deal with the fallout of an environmental and business disaster.

Shell too, for example, is still breathing thanks to its downstream business. But Shell was also not involved in the biggest oil spill in the history of oil in the Gulf of Mexico. So, while BP ended 2015 with a quarterly loss of $2.23 billion, Shell enjoyed a profit of $939 million. Shell also reported a full-year profit of $1.94 billion for 2015, versus a $900-million loss for BP.

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BP seems to be doing everything it can to tackle the hostile price environment it’s found itself in along with its peers. These efforts are indeed paying off to some extent: Had cost cuts not been pursued, things would have looked much worse. However, there is nothing the company can do against its thousands of plaintiffs who were not satisfied with settlements already reached.

The saga will in all probability continue, and BP will have to find new ways to make its shareholders happy in the medium-term.

Bob Dudley, the CEO, said at the presentation of the results that the oil price will end the year on the rise, which would certainly benefit the embattled oil major. Still, so many things could happen in the meantime and interfere with this forecast that it would be smarter to take it all on a wait-and-see basis.

By Irina Slav for Oilprice.com

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