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BP: Strong As Ever

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About: BP p.l.c. (BP)
by: Gaurav Agnihotri
Summary

BP’s earnings in 3Q19 plunged by 41% YoY.

Operating cash flows remain strong.

Upstream production remains flat in 3Q19.

I firmly believe that British Petroleum's (BP) latest financial results will not have any long-term negative impact on its stock price. In my earlier article, I had stated that British Petroleum's 3Q19 financial results will disappoint the market. And, I was right. BP's shares fell by 3% on Tuesday October 29th, after its 3Q19 earning results were declared. BP reported an underlying replacement cost profit (used as a proxy for net profit) of $2.25 billion for 3Q19, compared to $2.8 billion in 2Q19 and $3.8 billion in 3Q18.

A consistent drop in profits looks bad on paper, but investors should not worry. Although BP's earnings plunged by 41% YoY, they were still (slightly) more than market's expectation of $2 billion. Investors must also note that BP had already indicated that its 3Q19 financial numbers will be impacted by impairment charges (asset divestment transactions totaled $7.2 billion at the end of 3Q19) which are part of its asset divestment program. This shows that BP is working towards fulfilling its commitment of divesting assets worth $10 billion, a move that will help the company reduce its debt.

Image Source: BP 3Q19 earning results

Upstream numbers go down - but that was expected

Image Source: BP 3Q19 earning results

It is interesting to note that BP's performance was supported by its upstream numbers in 2Q19, with production increasing by 6.5% (YoY) in 2Q19. This quarter was different, as upstream production remained flat at 2.56 million barrels (compared to 2.6 million barrels in 2Q19), which was still 4.4% higher on a YoY basis.

This did not surprise anyone, as oil production was expected to come under pressure because of planned maintenance activities in Angola, Gulf of Mexico and North Sea. Besides, hurricane Barry in U.S Gulf of Mexico also impacted production. With $2.1 billion, BP reported a sharp decline in its 3Q19 upstream earnings when compared to 2Q19 and 3Q18 (refer the above figure for more details).

The downstream segment- which consists of fuel, lubricant and petrochemicals divisions disappointed (yet again) because of the effects of lower refining margins, adverse foreign exchange rate movements and low turnaround activity. Because of this, BP's downstream earnings went down (marginally) from $2.1 billion in 3Q18 to 1.8 billion in 3Q19. However, BP did make some long-term strategic moves in its downstream segment. One of them was forming a joint venture with India's Reliance Industries Limited (RIL) for setting up fuel retailing stations and EV charging stations in India.

I strongly believe that this strategic move will support BP in long term, as India is all set to become the world's biggest growth market for energy by the mid- 2020's. Besides, BP made an agreement with Didi Chuxing for setting up an EV-charging network across China, again a great strategic move! Looking at BP's stake in Rosneft, its underlying replacement cost profit increased from $638 million in 2Q19 to $802 million in 3Q19, thanks to better sales volumes.

"BP delivered strong operating cash flow and underlying earnings in a quarter that saw lower oil and gas prices and significant hurricane impacts. Our focus remains firmly on maintaining financial discipline and delivering safe and reliable operations throughout BP. We're also continuing to advance our strategy, making strong progress with our divestment plans and building exciting new opportunities in fast-growing downstream markets in Asia", said BP's CEO Bob Dudley.

Take away for Investors

Image Source: BP 3Q19 earning results

When we analyse the financials of any company, a strong operating cash flow is seen as a sign of efficiency and financial strength. When I look at BP's operating cash flow (excluding Gulf of Mexico oil spill payments), my confidence in the company increases even more! BP's operating cash flow for the first nine months of 2019 was $20.6 billion, compared to $18.9 billion during the first nine months of 2018. Investors must note that a strong operating cash flow will further help BP in reducing its debt.

Although the latest quarterly result looks weak (compared to the previous quarter), it wouldn't be wrong if I say that BP has succeeded in reporting better than expected results for the 11th consecutive time. BP has maintained its dividend pay-out rate (10.25 cents per share), its operating cash flow is increasing, and its asset divestment program is well on track. In my opinion, BP is the best energy stock for long term investment. Since, August 12, 2019, the stock has appreciated by 7.39%.

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.