Avoid BP On The Sell-Off, More Pain Is Yet To Come

| About: BP p.l.c. (BP)


BP has seen the biggest share price selloff in its history, yet this is not presenting a buying opportunity.

The company posted its biggest annual loss in 2015, and these losses are expected to expand over the coming quarters.

The company’s dividends are threatened amid falling cash potential.

Waiting longer before buying this stock could be a wise strategy.

BP PLC (NYSE:BP) has been falling at an unprecedented rate over the last twelve months, amid low commodity prices. Its stock price lost more than 27% of its value over the past twelve months. On the recent earnings announcement for the final quarter of 2015, BP's share price declined almost 9%. This is just one more negative amid rising concerns about its cash position and a greater-than-expected drop in earnings.

BP posted its most horrible annual loss in the past 20 years, despite reducing its cash costs for fiscal 2015 by $3.4 billion. It posted a loss of $6.5B for the year. BP's underlying replacement cost profit stood around $5.9 billion, representing an annual decline of 51%. Its Q4 replacement cost profit stood at only $196M on an underlying basis. This represents a fall of 90% compared with $2.2B in the same quarter of last year.

Due to the fall in commodity prices, its upstream underlying fourth quarter replacement cost loss before interest and taxes stood at $730 million, relative to a profit of $2.2 billion in the last year quarter. The company's overall production, excluding Russia, increased by 8% over the same quarter of last year. Nevertheless, BP's diversified portfolio provided some strength to its overall performance after big losses from its major upstream business. In Q4, its downstream underlying replacement cost profit stood around $1.2 billion, flat with the same period a year ago. Its lubricants and petrochemical businesses performed relatively well in the final quarter of 2015.

With the 59% fall in full year earnings, its operating cash flow, sans oil spill payments, declined by 38% to $20.3 billion. In addition, its organic capital expenditures stood at $18.7 billion, with the company distributing $6.7 billion in cash to shareholders through dividends. At this point, the company's operating cash flows are not covering its capital requirements and dividends, which raises a big question mark over the sustainability of these dividend payments.

BP's Strategy To Combat Uncertainty

The company is working on clear objectives for the short-term, which they call the four Ds: delivery in the business, disciplined capital and cash costs, completing divestments, and maintaining its dividends, which is the first priority in its financial framework. Commenting on its results, the CEO remarked, "We're really going too fast, re-basing both the upstream and downstream. We want to get the books so they can balance at $60/bbl next year."

Moving forward, the company is looking to cut costs and reduce its upstream workforce by 4,000 to 20,000 this year. It is also reducing its capital investments to provide support to its cash position. Despite these strategies, I'm expecting its dividends to remain unsafe in the coming quarters. The company will have to take on debt to pay uninterrupted dividends. Its CEO indicated that the company's debt could well rise this year as it works to sustain its dividends. This strategy will definitely impact its balance sheet and planned investments in the coming quarters.

In Conclusion

BP's stock price declined a lot following earnings announcement. Its stock could remain under pressure, with oil prices showing no signs of recovery. Current oil prices remain well below the $60 per barrel the company requires to break even. The company's dividends are in danger because of its continued poor results as well as the low oil prices. In addition, BP is expected to post even lower results over the next two quarters, based on current oil prices. Since the start of this year, oil has been trading around $30 per barrel, much lower than last year's average of $45. On the whole, BP is a risky play in the short-term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.