BP Liquidity Concerns to Aggravate if Weak Crude Environment Persists

BP Liquidity Concerns to Aggravate if Weak Crude Environment Persists

Bidness Etc discusses how BP has been hit with misfortunes one after the other

BP Liquidity Concerns to Aggravate if Weak Crude Environment Persists

By Muhammad Ali Khawar on Feb 3, 2016 at 9:41 am EST

Shares of BP plc (ADR) (NYSE:BP) tumbled to $29 on Tuesday’s market close, representing a decline of 8.52%. The stock has crashed over 45% since July 2014, and the downfall is expected to continue with the current trend. The decline in stock price on Tuesday can be attributed to the highly disappointing earnings released recently, as well as the decline in crude prices.


The fourth quarter earnings for BP left investors highly dissatisfied, and can be deemed responsible for the massive plunge in stock price yesterday. The company reported adjusted net income of $196 million, which came in four times below the consensus estimate. The number was less compared to last year’s levels as well.

The table below shows the historical net income adjusted and revenues for BP for the last two years.

As exhibited from the table, BP’s adjusted net income and revenues have fallen consistently since the third quarter of fiscal 2014. The net income margin for the company also came in at a negative 6.73%. We expect the profitability woes to continue in the upcoming quarters.

Gulf of Mexico Oil Spill Incident

The 2010 Gulf of Mexico incident proved to be highly damaging for BP. Fortunately, the company back then was in a much better position to face losses incurred from the incident, as crude oil prices then were comparatively higher than today’s levels.

The oil spill proved to be disastrous for the environment, and unsurprisingly BP, received a lot of flak for that. The company lost one case after the other. First, there was disagreement over the amount of oil spilled. BP also expressed dissatisfaction with the penalty imposed, but subsequently gave in due to being unable to defend itself in the face of the significant impact of the spill. The company is still in the process of finalizing a $20.8 billion penalty with the US, and has spent a massive $55.5 billion on costs related to the incident.

Liquidity Issues

Following the earning results, BP was left with no choice but to cut costs further. The company has decided to make 4,000 upstream workers redundant. It plans to cut an additional 3,000 jobs in its global operations by 2017.

The company’s capital expenditure for the quarter came in at $18.7 billion, falling behind the projected target of $24–26 billion. The 2016 capital expenditure is expected to further decline this year. While layoffs and capital expenditure have been a normal part of BP’s plans, the company continues to maintain its dividend.

As shown in the table, the long-term debt/equity as well as the total debt/equity ratios for BP have risen in the past year. This isn’t a good indication for companies involved mainly in the oil and gas sector.

Crude Oil Price

Crude prices fell yet again on Tuesday to hover around $30 a barrel. During Asian trading on Wednesday, the US benchmark for crude oil, West Texas Intermediate was up 1.04% at $30.19 per barrel. Brent Crude, global benchmark for crude oil, was up 0.64% at $32.93 per barrel.

The Organization of Petroleum Exporting Countries (OPEC) remains adamant on keeping production at the current high levels. The slowdown in Chinese economy also continues to weigh down on industries worldwide, including BP. While BP CEO Bob Dudley believes that demand and supply dynamics for crude will stabilize by the third quarter this year, Bidness Etc is of the opinion that the issue will continue to the subsequent quarters.

If crude remains in the $30–40 range, energy companies can be expected to post poorer results for the 1QFY16. Raising finance would become another problem, and tapping a debt market would mean further deterioration in the balance sheet. Moreover, investors will be wary of opting for energy stocks. The S&P already cut Royal Dutch Shell plc’s rating on Monday, and gave a negative outlook on BP as well.

Editing by Asad Rizvi; Graphics by Waqas Khan

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