The London-listed shares of oil giant BP (BP) tanked by around 7% in early FTSE trading after it announced a big fall in fourth-quarter profit, and no wonder. A look at the report shows that the company is making a huge bet that oil prices have bottomed.
Underlying replacement cost profit, which is the measure preferred by analysts and market observers, fell to $196 million in the fourth quarter of last year. This is a loss of more than 90% from the fourth quarter of 2014 and of just under 90% compared with the third quarter.
The measure reflects the replacement cost of inventories sold in the period and is adjusted for non-operating items and fair value accounting effects.
On the restructuring side, the company announced 3,000 more job cuts in addition to some 4,000 jobs in exploration and production already announced. The 3,000 additional jobs will be cut in refining and marketing by 2017.
However, BP maintained its dividend at $0.10 a share, or a total of $1.5 billion in the fourth quarter going to shareholders; from the earnings figure, it should be quite clear that BP simply does not have the profit to cover the dividend -- unless oil prices have indeed bottomed and will reverse.
For the full year, the total cost of dividends was $6.7 billion, compared with $5.9 billion in underlying replacement cost profit.
David Peltier, the Dividend Stock Advisor portfolio manager, has highlighted in a series of articles how difficult it is for energy companies to maintain their payouts to shareholders in this low oil price environment.
(By the way, if you want to get a glimpse of David's portfolio, as well as Jim Cramer's Action Alerts PLUS charity portfolio and a wealth of other analysis from market experts, take advantage of the Open House offer that gives you free access to everything that is normally behind the paywall.)
BP's stock is rated as a "hold" by TheStreet's Quant Ratings, which considers the solid financial positions one of the company's main strengths.
However, that strength seems to be deteriorating rapidly: BP posted a $1.5 billion increase in net debt in the fourth quarter, to $27.2 billion. That still leaves its debt-to-equity ratio at a comfortable 0.27, but the direction of travel has many analysts uneasy about the company's prospects.
As the Wall Street Journal reports, credit rating agency Standard & Poor's put BP on a negative watch late on Monday, before the release of the results, arguing that "its credit metrics will not improve in 2016-2017 as previously expected."
By its own admission, BP does not have an extraordinarily rosy outlook on the future in terms of production growth.
"We expect full-year 2016 underlying production to be broadly flat with 2015. The actual reported outcome will depend on the exact timing of project start-ups, divestments, OPEC quotas and entitlement impacts in our production-sharing agreements," the company wrote in its earnings release.
Production in the first quarter will be around the same as in the fourth quarter of last year and, what is worse, BP said: "Oil prices continue to be challenging in the near term."
BP CEO Bob Dudley sought to reassure investors that the company was moving rapidly "to adapt and rebalance," making good progress in cutting costs and capital spending.
"Our plans set out a clear course for BP for the medium term and will allow us to deliver growth in the longer term. All of this underpins our commitment to sustaining our dividend and then growing free cash flow and shareholder distributions over the long term," he said.
With other energy giants in Europe, such as Italy's Eni SpA (E), already having cut dividends, BP is certainly bucking the trend and making a huge bet that oil prices will go north from here. Investors, at least for now, don't seem to like it.
Further reading on oil prices:
