BP Swings Back to Profit in Q3 (Update)

(Adds comments from analysts' call)

BP's underlying replacement cost (RC) profit recovered to $86mn in the third quarter, from a $6.68bn loss in the second quarter, the UK major reported on October 27. This was achieved despite lower gas prices and refining and marketing margins than the company's assumptions for profitability.

What the CEO Bernard Looney called the "business of business" in an analysts' call had yielded material savings in a very difficult period, with wells drilled ahead of schedule with better reliability; costs lowered; and discoveries adding to the company's reserves. 

BP attributed the better than expected result to the absence of major exploration write-offs and a rebound in prices and demand for oil and gas – Henry Hub is around $3/mn Btu next year, up from about $2/mn Btu this year – partly offset by a "significantly lower oil trading result." But its underlying RC profit was considerably weaker than in Q3 2019, when it came to $2.25bn.

The quarter-on-quarter improvement came on the back of stronger upstream performance, with the segment's underlying RC profit before interest and tax reaching $878mn in the three-month period, versus a $8.49bn loss in Q2 2020. Its upstream income in Q3 2019 was $2.14bn.

In the analysts' briefing Looney warned that owing to Covid-19 some maintenance that would normally have occurred over the summer had been pushed back into the last quarter, meaning lower oil and gas production then. 

Downstream earnings slumped to $636mn, from $1.41bn in Q2 2020 and $1.88bn in Q3 2019. BP also incurred a $177mn loss from its 19.75% stake in Russian national oil giant Rosneft, versus a $61mn loss in the previous three months and a $802mn gain a year earlier.

"The underlying business performance in the quarter remained resilient and we made substantial progress in strengthening our balance sheet," CFO Murray Auchincloss said in a statement. 

BP booked a net loss attributable to shareholders of $450mn for the quarter, marking an improvement on $16.8bn in losses in Q2 2020 and $749mn in losses in Q3 2019. Operating cash flow, excluding Gulf of Mexico oil spill payments, held firm at $5.3bn, versus $6.5bn a year earlier, and BP was able to clear $0.5bn from its debt pile over the quarter, reducing the net total to $40.4bn. The target is $35bn, at which point dividends will be a priority.

BP is targeting $25bn of divestments by 2025, and has already completed or agreed deals covering half of this sum, including the $5bn sale of its petrochemicals business to UK firm Ineos, due to close by the end of the year. It raised $0.6bn from sales over the quarter, although excluded from that was the planned sale of some North Sea assets to Premier, cancelled by the latter's planned takeover by Chrysaor. Looney made it clear that he was in no hurry to secure the divestment figure and he would wait for a competitive price.

BP is also aiming to achieve $2.5bn in annual cost savings by the end of 2021, although Looney said that this figure might increase further as the company strove to keep the lid on costs. "We will not let rising costs erode that," he said, referring to the expected stronger market for oil and gas.

BP spent $9.1bn on capital projects in the first nine months of 2020, putting it on track to meet its full-year target of $12bn. Looney said the company had had some exploration successes, following its strategy of drilling around hubs "to maximise the value of past investments." Seven out of seven wells added resources in the Gulf of Mexico, Egypt and Trinidad & Tobago that could be brought on stream relatively quickly using existing infrastructure. 

In Oman, where gas is flowing ahead of schedule from the Ghazeer field, he said that the condensate was richer than expected but he said the gas was for Oman and he did not comment on the rise in exports of LNG. An analyst said the plant was running at above 100% of nameplate capacity.