BP profits slump 66% as Covid-19 'destroys' oil demand

(Sharecast News) - First quarter profits at BP slumped by 66% on collapsing oil prices and "demand destruction" caused by the coronavirus pandemic although the company still decided to retain a dividend.
Underlying replacement cost profit, used as a measure of net profit, fell to $791m, compared with $2.35bn in the first quarter of 2019. BP also said it would slash annual capital spending to $12bn, a 25% cut on guidance given in February.

The oil giant said on Tuesday added that it would still pay a quarterly dividend of 10.5 cents a share.

Demand for oil has fallen through the floor on the back of government lockdowns and bans on air travel to stymie the spread of the virus. A glut of supply that existed before the pandemic took hold has exacerbated the problem, with producers now struggling to store excess inventory.

"Looking forward, there remains an exceptional level of uncertainty regarding the near-term outlook for prices and product demand, particularly while many economies remain under lockdown," said chief executive Bernard Looney, presiding over his first set of results.

"There is the risk of more sustained consequences depending on the efforts of governments and the public and private sectors to manage the health, economic and financial stability effects of the pandemic."

Net debt rose $6bn in the period to $51.4bn, resulting in a gearing ratio of 36.2%. BP added that it had about $32bn in available liquidity after taking measures to strengthen its balance sheet.

Upstream, output dropped to 2,579m barrels equivalent a day, down 2.9%year on year, while lower demand for jet fuel, gasoline and other refining products saw downstream results plunge to $921m from $1.4bn in the fourth quarter on an underlying replacement cost basis.

BP said it still planned to deliver $15bn of divestments but the timing would be affected by the renegotiation of Hilcorp Energy's $5.6bn (?4.5bn) purchase of its Alaskan assets.

The company on Monday altered the sale terms in favour of Hilcorp to take account of volatile markets and the depressed oil price.

The purchase price will remain the same but the structure and timing of payments have been changed, BP said. Hilcorp had originally agreed to pay BP $4bn in the near term and $1.6bn through an earn-out later. The US energy group paid BP a $500m deposit when the deal was signed in 2019.

Under the revised terms Hilcorp will pay BP less during 2020. The companies will share cash flow in the near term and will have interest-bearing vendor financing. More of the sale price could also be subject to earn-out arrangements.

Hargreaves Lansdown analyst Nicholas Hyett said the decision to pay a dividend at a time when most companies were suspending payouts was coming "at significant cost".

"Net debt shot up some $6bn this quarter and the group's upper gearing limit is rapidly disappearing into the rear-view mirror. Negative free cash flow means the balance sheet would be deteriorating even without the dividend, and with a sizeable expense related to the Gulf of Mexico oil spill expected next quarter, things look set to get worse before they get better," he said.

Hyett added that longer term BP needed higher oil prices or lower operating costs, "and ideally both".

"BP's aiming for $35 oil breakeven. That's still some way above where the oil price is now, but the closer to that level BP can get the longer its existing liquidity will last and the better its chances of making it out the other side of this crisis without the all-important dividend needing a haircut."