BP PLC (LSE:BP.) has contrived to post a third-quarter post-tax loss of US$2,544mln.
How, in an era when oil prices are higher than Jeff Bezos’s opinion of himself, is this possible?
Well, a good place to start is the old gag about the accountant who asks the chief financial officer (CFO) of a company how much or how little would the CFO like to declare as profit in the reporting period.
Adjusting items - accounts items that the CFO throws into the pot to make the stew a bit spicier or blander - in the third quarter put a US$6,416 million dent in BP's pretax profits.
The third-quarter charges were driven by adverse fair value accounting effects – adjustments to the perceived current market valuation of assets - of US$6,101mln, primarily arising from the exceptional increase in forward gas prices towards the end of the quarter.
Under international financial reporting standards (IFRS), reported earnings include the mark-to-market value of the hedges used to risk-manage forward liquefied natural gas (LNG) contracts, but not of the LNG contracts themselves. This mismatch at the end of the third quarter is expected to unwind if prices decline and as the cargoes are delivered, BP said.
So, that’s how we end up with one of the biggest oil companies in the world being able to boast – if that’s the right word – of struggling to make a profit in a set of results inconveniently scheduled to coincide with the UN Climate Change Conference (COP26).
For the City audience, however, it was able to point to an underlying replacement cost profit of US$3.3bn, up from US$2.8bn in the previous quarter.
“This was primarily driven by a surge in commodity prices as well as higher refining availability and throughput enabling the capture of a stronger environment and a stronger gas marketing and trading result, partly offset by a higher underlying tax charge,” said Neil Shah, the head of research at Edison Group.
Make no mistake; BP is still rolling in cash. It expects to spend another US$1.25bn on buying back shares after positive cash flow in the third quarter of US$933mln.
“The group has also continued to make some strides in its low-carbon initiatives, aptly timed given COP26 over the next two weeks, as it has added a further 2GW [gigawatts] to its renewables timeline, making its target of 25GW by 2025 all the more likely,” Shah noted.
Russ Mould, the investment director of AJ Bell, said higher oil and gas prices “are stoking BP’s financial performance and leaving it with the cash flow to both invest in renewable and alternative energy sources and reward shareholders for their support”.
“Environmental campaigners will welcome the former but argue that the money used for the latter could instead be deployed to accelerate the company’s transition away from hydrocarbons,” Mould said.