BP PLC (LON:BP.) swung to a loss in the third quarter as underlying profits slumped 39% due to lower oil prices and it took a US$2.6bn impairment charge from previous disposals.

Underlying replacement cost profit in the three months to end-September dropped to US$2.3bn from US$3.8bn this time last year as the Upstream exploration, development and production business profits plunged 47%.

The average price of a barrel of Brent crude was US$62 in the quarter and WTI in the US was US$56.40, down 18% and 19% respectively on the same period last year.

While total oil and gas production was up 3% in the quarter to 3.7mln barrels of oil equivalent (boepd), excluding BP’s stake in Russia’s Rosneft, underlying production was down 2.5% due to maintenance activities and the effects of hurricanes in the Gulf of Mexico.

The Downstream business produced a stronger underlying profit than expected as fuels trading and oil trading was strong.

Better profits than expected, but dividend held

A reported loss for the quarter of US$0.7bn followed a write-down relating to the disposal of BPX Energy assets, the exit from Alaska and from the Gulf of Suez Petroleum Company, with BP having made US$7.2bn of divestments in 2019 and expected to take this to US$10bnb by year-end.

However, the quarter’s profit was better than analysts had estimated due to the contribution from Rosneft and lower tax, though debt gearing was around 32% of the company’s market value, well above its target 20%-30% range.

Chief executive Bob Dudley, who it was announced earlier this month will be leaving the company after February’s full-year results, pointed to US$6.5bn of operating cash flow, excluding US$0.4bn of payments from the Gulf of Mexico oil spill.

He added: “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.”

BP management said gearing would remain above its target range this year, which analysts and investors infer as not encouraging for the company’s ability to raise returns via dividends and buybacks.

The quarterly dividend was held at 10.25 cents per share and chief financial officer Brian Gilvary told analysts on a conference call that the company was unlikely to raise its dividend this year, which disappointed some investors. The scrip dividend option was also suspended.

Market reaction

BP shares leaked lower as the dividend disappointment spread, dropping 4% to 491.7p by Tuesday afternoon.

UBS noted that underlying profits (EBIT) of US$4.53bn was 7% better than the consensus forecast of US$4.24bn as, while the Upstream was a miss, the Rosneft share “was strong”, estimated at US$802mln versus consensus of US$480mln, and taxes were lower. 

“Even without the lower tax than guided the results would have been a beat,” UBS analysts said. 

Analysts at RBC noted that, gearing “remains well above the usual range”, at circa 35.6% including leases, but saw it was a positive that BP has decided to remove its scrip dividend option going forward.

“Based on our recent conversations, we think some investors have been calling for a dividend per share increase in the near term, however given where the balance sheet stands, this is a prudent step in our view.”

Russ Mould, investment director at AJ Bell, said: “We often hear about the merits of focus in the corporate world but today’s third quarter numbers from oil major BP are an advert for the benefits of a being a big diversified operation.

“Lower oil prices and storm outages might have hit profit in the oil production part of the business, but the arm which refines oil into end products like jet fuel and petrol has had a strong quarter and helped the company beat expectations.”

Mould said investors might be concerned by a significant increase in debt, but “at least cash flow and underlying earnings were fairly robust”. 

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