Here's What to Expect From BP's Q2 Results on Tuesday
Cheap oil and charges from the Deepwater Horizon disaster mean that BP's (BP) - Get Report headline figures will be predictably grim when it publishes its second quarter results on Tuesday. But, given the low expectations, the British oil company can still impress if it can show it continues to lead rivals in cost reduction, spin a good growth story and convince investors its dividend is secure.
BP is expected to report an underlying replacement cost profit of about $840 million for the three months to June 30, according to analyst consensus. That would be 35% lower than the $1.3 billion booked over the same period last year, but up 58% on its first quarter underlying profit of $532 million.
Much of that quarter-on-quarter gain is, not surprisingly, due to stronger, if still historically low, oil prices. In the past three months Brent Crude has climbed from about $40 a barrel through March to near $50 a barrel at the end of June, up about $10 a barrel on the previous three months daily average.
Oil fell on Monday to $45.45 a barrel dragged lower by a glut of processed petroleum products and an increase in the U.S. rig count that suggests that production is growing. That price is too low for BP, which needs $50 to $55 a barrel to cover its expenditure and dividend from organic cash flow. The longer oil sits below that mark the greater the pressure will grow on BP's all-important dividend.
Earning may also have been impacted, though perhaps not quite yet, by a recent sharp increase in global refined products inventories. The U.S. added 900,000 barrels to its reserves last week, while China exported record amounts of gasoline in June. That could weigh on BP's refining and trading profits which underpinned its stronger than expected results in the first quarter.
If oil price remains a going concern BP is likely to use its Q2 results presentation to draw a line under another of its persistent worries. BP said on July 14 it expects to book a $2.5 billion charge in the second quarter, representing its estimate of the remaining liabilities from the Deepwater Horizon spill. The charge will take BP's total expected costs from the lethal explosion and resulting oil spill to $61.6 billion including litigation, clean up costs and fines.
What good news there has been from BP's earnings in recent quarters has come from its aggressive cost cutting - though that may be coming to an end. BP surprised on this front at its first-quarter figures presentation when it predicted that capital expenditure for 2016 would fall to $15 billion - $17 billion in 2017, down from its earlier forecast of $17 billion - $19 billion.
The risk there is that investors have become used to reducing costs. BP may have already scraped its barrel clean and though CEO Bob Dudley could still surprise, it is hard to see where significant additional cost savings can be found.
More likely is that BP will attempt to reassert its growth credentials as it seeks to prove that the six years spent nursing the Deepwater Horizon tragedy, and the sale of about $50 billion of assets, haven't seen it left behind by the likes of Shell (undefined) and Exxon Mobil (XOM) - Get Report , both of which have loaded up on natural gas assets in recent years. Shell and Exxon will report their quarterly numbers on Thursday and Friday respectively.
There may yet be a further announcement on asset sales, with recent reports suggesting the company is shopping its stake in the U.K. Oil Pipeline and storage terminals in Belfast, Hamble and Northampton.
Analysts are split on the prospects for the company. Barclays, earlier this month, said BP was heading "towards a sweet spot" when it made the company its top oil pick with a 12-month target price of 600 pence ($7.87). The last time BP traded at that level was in the days before the Deepwater explosion. Goldman Sachs is less bullish, and has a price target of 405 pence per BP share, while Tudor Pickering Holt is tipping 452 pence. Goldman and Tudor Pickering both rate BP a hold.
BP shares traded Monday at 445.9 pence, down 6.2 pence or 1.4% on the day.