$50 oil drains BP profits

Profits plunge 10% at the oil giant, but investment cutbacks and a surprise return from Russia keep investors happy.

by Adam Gale
Last Updated: 28 Apr 2015

While you’re enjoying the economic stimulus of cheap oil or just that feeling of extra weight in your pocket after a trip to the petrol station, spare a thought for the big oil firms. The crude collapse is hitting them hard.

BP announced today that its underlying full year profits fell 10% to $12.1bn (£8bn – cue melancholic violin solo), while its fourth quarter profits fell 20% to $2.2bn. Throw in a few one-off costs and a $3.6bn impairment on the value of its reserves and ‘upstream’ or exploratory investments, and technically BP reported a quarterly loss of £969m.

The cause, of course, is the price war between OPEC sheikhs and US frackers cutting the value of oil in half. BP said the average price of a barrel last quarter was $77 compared to $109 a year earlier. So far in 2015, it’s been $48.

The company formerly known as British Petroleum has reacted to this ‘challenging phase’ as you might imagine it would, by battening down the hatches, or 'resetting', as boss Bob Dudley put it. Alongside cost-cutting measures announced earlier, BP said it's planning to cut capital expenditure in 2015 by $4-6bn to roughly $20bn, as the high costs of exploration, particularly those associated with fracking, make some projects unprofitable.

Cost cutting is hardly unusual for a company the size of BP, of course, and there’s no point wasting the opportunity of a good crisis to do a bit more. It’s possible, however, that BP and its peers are cutting back on investment to limit the duration of the price slump. Less investment now means less supply in future, which means higher prices.

Either way, holding onto a bit of cash might seem like a good idea, given that BP still can’t shift the after effects of its disastrous 2010 Gulf of Mexico spill. Having paid out $477m in the last three months, its total fines now stand at an eye watering $43.5bn and there’s more to come. A US government case against BP under the Clean Water Act is currently being decided, and is expected to land the firm with a final $13.7bn hit.

With all this bad news, it might seem surprising that BP’s shares rose 2.6% to £4.49 this morning. As ever, the market looks to the relative rather than the absolute – it expected BP to do worse. In particular, there would have been surprise at the company’s income from Rosneft, the Russian state-run oil firm in which BP has a 19.5% stake.

Despite having faced sanctions and volatility over Russia’s actions in Ukraine, Rosneft actually managed to return a profit. BP’s underlying net income from that firm last quarter was $370m, down on the $1.1bn it made last year, but still positive. Vladimir Putin will be happy.

An industry in retreat

BP may be suffering, but it’s not the hardest hit. BG (once part of British Gas) announced a $6bn asset write off today, and said it’s slashing capital expenditure by a further $6-7bn. Exxon Mobil, Chevron, ConocoPhillips and Shell have reported falls in earnings.

Shell plans to reduce its capital expenditure by $15bn over three years, and has revealed an unusual tool to scale back some of its North Sea assets. The Anglo-Dutch firm plans to use the giant ship Pieter Shelte (indelicately named after a famous engineer and, ahem, Waffen SS member) to cut the 23,500 tonne top off its now defunct Brent Delta oil rig, and then carry it to Hartlepool to be dismantled and turned into washing machine parts.

Shell said it plans to decommission four of its more than 30 rigs over the next ten years, and expects the total cost of removing the UK’s 470 North Sea oil installations to come to £40bn by 2040.

The North Sea fields are generally expected to last 30 or 40 years before they dry up. The sheer resilience of giants like BP and Shell, however, makes it likely they’ll still be around long after their rigs finally fall silent. Unless, that is, the world  wakes up to climate change in a big way and decides to break the oil dependency - but don't hold your breath for that one.

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