By Irina Slav
BP (NYSE:BP) is buying back shares the company issued to cover its dividend payout amid the oil price crash. The news was widely seen as a clear indication that one of the world’s supermajors has successfully adjusted to the new price normal and is now settling in the business-as-usual rut once again.
Yet, this is a new rut of strict cost controls, continuous efforts to keep lowering production costs, and working to mend the reputation stain left by the 2011 Deepwater Horizon disaster.
The combination of these factors, along with higher oil prices, of course, helped the company boost its third-quarter net profit substantially, and according to BP executives, the road ahead is clear and the direction is back to growth, with breakeven at $49 a barrel.
The breakeven price has become a metric that oil investors and analysts are watching like hawks. It didn’t matter when Brent sold for over $120 a barrel, but now that the profit margins have been squeezed so tightly, breakeven has come to the fore and BP is just one of many oil majors striving to bring it down as low as it can go.
The share buyback news pulled BP’s shares higher and with a good reason. The UK-based major became the first among its peers to start buying back shares as it feels confident enough with the current cash flows. This confidence means BP has enough cash on hand to fund dividend payments in full. Investors and analysts have traditionally watched the cash metric closely, as it caused much worry during the price downturn.
The obvious question: How sustainable is this sentiment? The answer is complex and involves factors such as technological progress, climate change measures, and global oil fundamentals, but one thing seems certain: The sustainable improvement in BP’s and other supermajors’ results will, to a large extent, hinge on refining operations.
BP’s third-quarter performance - a more than doubling of net profits to $1.9 billion - came largely on the back of an increase in downstream profits, which hit US$2.3 billion. To compare, upstream profits came in at $1.6 billion.
Downstream operations have helped all the supermajors survive the price collapse, and it seems they will continue to provide strong support to the bottom line. Recently, Wood Mackenzie forecast that rising demand for petrochemicals will save integrated oil companies from a slump in financial performance, becoming the main driver for oil demand, to replace fuels.
Another recent paper reinforces this expectation. A report from Carbon Tracker suggests a quarter of refining capacity in the world will go under by 2035 if all the governments that have undertaken initiatives to slow down the rate of global warming to 2 degree Celsius by that year stick to their promises.
Those who have complex refining operations, Carbon Trackers said, will survive, thanks to the variety of products they market. Refiners of a simpler nature will be squeezed out of the market by consistently lower margins resulting from lower oil demand. That’s good news for the supermajors with their complex refining operations, and BP’s latest figures are just one more piece of evidence that they’re on the right track with cutting costs across operations and finding ways to strengthen refining margins further through efficiency boosts and new products.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.