BP PLC (LSE:BP.) third-quarter results were expected to show monster profits but turned out to be a Halloween fright instead.
Was this a ‘kitchen sinking’ exercise before the appointment of a new permanent chief executive – dump all the bad stuff at once to absorb the hit now so a new boss doesn’t have to – or something else?
CEO Bernard Looney made a late-night exit six weeks ago – after not being 'fully transparent' about past relationships with colleagues.
Since then, with finance chief Murray Auchincloss named interim CEO, the shares rose 7% to a seven-month high earlier this month as oil prices spiked again, but today saw more than £4 billion wiped off the company's market value.
While Auchincloss later told reporters that he doesn’t see BP as a takeover target, the initial shock was the 18% profit miss versus consensus City forecasts, said UBS, pointing to “a weaker performance across the board”.
The miss, said Barclays, was 35% lower than its forecast and came from a weaker-than-anticipated gas trading result but there were "some positives" in the results, including lower debt.
Write-down can be a 'kitchen sinking' ploy for companies.
Barclays highlighted that BP announced a further US$540 million impairment charge taken on its offshore US wind assets.
Over the first nine months of the year, total impairments were US$1.9 billion – which looks tiny compared to the US$26.9 billion a year ago due to BP exiting its investment in Russia's Rosneft.
Drilling down
In particular, Gas & Low Carbon Energy EBIT was a 42% miss versus the average analyst estimate, UBS noted, attributed to weaker trading despite higher production.
Realised gas sales were 7% below estimates due to greater price lag effects, while group production was 2% higher than expected.
And in Refining, profit margins are expected to trend significantly lower.
Customers and Products, which comprises the retail elements of the group's petrol stations and forecourts, was 15% below consensus.
Better in other ways
Taking a more positive view, BP’s numbers have improved on the second quarter, analysts at RBC Brewin Dolphin noted.
Profits and free cash flow also remained relatively strong, tying in with a trend in the past couple of years for oil and gas companies to announce disappointing profits but report bumper cash flows.
BP's operating cash flow of US$8.75 billion in the last quarter came in slightly higher than expected too, up 5.5% on a year ago and 39% on the second quarter of this year.
This underpins a higher dividend than last year at 7.27p and a new US$1.5 billion share buyback.
More disappointment or to be expected?
Part of the share price fall might have been because even bigger shareholder returns were expected.
Indeed, UBS noted that for City analysts’ buyback estimates “risk was seen to the upside we believe”.
BP is not unfamiliar with “wild swings” in quarterly profit such as the one seen today, said analysts at AJ Bell.
Derren Nathan, head of equity research at Hargreaves Lansdown, saw the results overall as a “mixed bag” but felt the strong cash flow was still enabling it to invest in new projects, make inroads into trimming debt and make payouts that are still generous even if some wanted more.
Bumpier or smooth outlook?
“Whilst the oil pricing outlook remains strong there are some headwinds blowing into the fourth quarter,” he noted, but while the high oil price is favourable to the upstream operations, the petrol station forecourts remain sensitive to the cost of supply.
Nathan added: “Despite a strong run in the shares, the valuation remains well below the long-term average. The market has been disappointed by today’s results and concerns remain around the group’s renewable ambitions, but fundamentally BP is well placed to continue building shareholder value.”
AJ Bell's Russ Mould said the solid cash flows and shareholder returns do not mean all is well at BP, with the shock departure of Looney leaving the company “lacking some direction at a critical juncture where questions about commitment to its net zero strategy are mounting up".
On the big write-down to the value of its US offshore wind portfolio, Mould said “it will do nothing to quell the doubters who think it should, much as its US counterparts have done, stick to its knitting of oil and gas and not invest in greener forms of energy with less tried and tested levels of return.
“Whether this is an approach which can be sustained over the long term is open to question.”
He said Auchincloss needs to “try and keep the ship on course” while the wait for a permanent appointment goes on.