BP p.l.c. (NYSE:BP), the first super-major integrated oil & gas company to report first-quarter earnings, posted a surprise profit as a stronger-than-expected refining and trading performance helped mitigate the lowest crude prices in the last 12 years. On April 26, BP reported its first quarter 2016 financial results, which beat EPS expectations by a big margin of $0.34 (200%). As a result, BP's shares climbed 5.35% in that trading day. BP showed earnings per share surprise in four of its last six quarters, as shown in the table below.
Source: Yahoo Finance
Underlying replacement cost profit for the quarter was $532 million, compared with $196 million for the previous quarter and $2.6 billion for the first quarter of 2015. Compared with the previous quarter, lower costs throughout the group more than offset the impact of significantly weaker oil and gas prices and refining margins.
In the report, Bob Dudley, BP group chief executive, said:
Despite the challenging environment, we are driving towards our near-term goal of rebalancing BP's cash flows. Operational performance is strong and our work to reset costs has considerable momentum and is delivering results. Furthermore, development of our next wave of material upstream projects is well on track. Market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year.
In contrast to upstream operation's profitability that is directly correlated to oil prices, the downstream operation is benefiting from the continued high refining margins and strong demand for refined products. While BP's upstream profit before interest and tax in the last quarter was negative at -$747 million, downstream profit before interest and tax was at $1,813 million. However, the combined upstream and downstream profit decreased 61.4% in the period compared to the same period a year ago, as shown in the chart below.
Source: Company's reports
After three-quarters where the company was able to generate free cash flow, BP recorded negative free cash flow in the last quarter, as shown in the chart below. Net cash provided by operating activities in the first quarter of 2016 was at $1,872 million, and capital expenditure was at $4,381 million, resulting in negative free cash flow of -$2,509 million.
Source: Company's reports
However, looking forward, oil prices have shown a significant rebound in the last three months, which makes me think that the worst for oil prices is over. Brent crude oil last price of $47.01 per barrel is already up 56% from its 12-year low on January 20, of $30.14, while WTI crude oil last price of $45.19 per barrel is up 42.2% from its January 20 low of $31.77.
According to OilPrice.com, the collapse of the rig count and depressed drilling activity has already knocked about 700,000 barrels per day of oil production offline. However, the rig count could bottom out this year and begin climbing again. Nevertheless, the U.S. Department of Energy [EIA] does not expect oil production to rise in the short run even if the rig count rebounds. Oil production is expected to continue to fall through 2017 as too few new wells come online to replace rapidly falling shale output. Total U.S. oil production is expected to decline from 9.43 million barrel per day in 2015 to 8.04 million barrel per day in 2017, a figure that includes rising output from the Gulf of Mexico. According to EIA, the sharp decline in oil prices since the fourth quarter of 2014 has had a significant effect on drilling in the United States. The number of active onshore drilling rigs in the Lower 48 states fell 78% (from 1,876 to 412) between the weeks ending on October 31, 2014, and April 15, 2016, according to data from Baker Hughes (NYSE:BHI). The decline in active rigs and well completions is projected to result in month-over-month onshore oil production declines of 120,000 barrel per day through September 2016. All in all, oil supply and demand are expected to be back in balance by the end of this year.
Brent Crude Oil, June 2016 Leading Contract With 50 Day Moving Average
WTI Crude Oil, June 2016 Leading Contract With 50 Day Moving Average
Charts: TradeStation Group, Inc.
Since the beginning of the year, BP's stock is up 8.3% while the S&P 500 Index has increased 2.5%, and the Nasdaq Composite Index has lost 2.9%. However, since the beginning of 2012, BP's stock has lost 20.8%, in this period, the S&P 500 Index has increased 66.6%, and the Nasdaq Composite Index has risen 86.7%.
BP Daily Chart
BP Weekly Chart
Charts: TradeStation Group, Inc.
Although BP's stock is not cheap regarding its valuation multiples, it is not very expensive either. The forward P/E is low at 13.46, and the price to sales is extremely low at 0.46. The Enterprise Value/EBITDA ratio is at 16.92, the price to book value is low at 1.06, and the price to cash flow is at 11.75.
BP is continuing to make clear commitments to the sustainability of its dividend, despite the challenges of the current oil price environment. Along the recent earnings release, Brian Gilvary, chief financial officer, said:
As we steadily take out more costs, the point at which we expect to be able to rebalance 2017 organic sources and uses of cash continues to move lower; we currently anticipate being able to achieve this at oil prices in the range $50-55 a barrel. This progress underpins our commitment to sustaining BP's dividend as the first priority within our financial frame. Should prices remain low, we have the flexibility to adjust further within the financial framework.
At the end of the first quarter, BP had cash and cash equivalents of $23 billion, compared to $26.4 billion at the end of fourth quarter of 2015. Cash from operating activities in the last quarter was $1.87 billion, compared to $5.81 billion the final quarter of 2015. Total debt was at $54 billion at the end of the last quarter, up from $53.2 billion at the end of the fourth quarter of 2015.
Since BP can access the debt markets for additional liquidity if needed, and it is committed to sustaining the dividend, I believe that the current annualized dividend of $2.40 is sustainable. The current yield of 7.09% is historically high, which indicates that the stock is undervalued, according to some dividend assessment theories. The annual rate of dividend growth over the past three years was at 6.6%, and over the last ten years was at 1.4%.
Despite the challenging environment, BP delivered quarterly results that exceeded estimates, and according to the company, it is driving towards its near-term goal of rebalancing BP's cash flows. According to OilPrice.com and the company, market fundamentals continue to suggest that the combination of robust demand and weak supply growth will move global oil markets closer into balance by the end of the year. In my opinion, at the current price BP is an excellent long-term investment, first for the generous dividend yielding about 7.1%, and second for a significant price appreciation as oil prices continue to recover.
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.