Shares in BP (LSE: BP) have slumped this morning and are currently trading down around 7% after the company revealed it had swung to a $2.2bn loss for the last quarter of 2015 and announced thousands more job cuts.
BP reported an underlying replacement cost profit for the fourth quarter of just $196m, down 91% year-on-year and well short of City expectations. Underlying replacement cost profit is analysts’ preferred measure of profitability for companies such as BP as the measure strips out one-off charges. On an unadjusted basis, BP’s loss of $2.2bn compared with a loss of $969m the previous year.
Once again, profits from BP’s downstream (refining and marketing) segment helped offset the majority of the losses incurred by the company’s upstream (production) arm. The downstream segment reported an underlying pre-tax replacement cost profit of $1.2bn for the quarter while the upstream division reported an underlying replacement cost loss of $728m.
For the full year, BP’s downstream operations racked up pre-tax earnings of $7.5bn, a record for the segment, helping to offset losses in the upstream division and showing the benefits of BP’s vertical integration.
Thanks to downstream’s strong performance, BP’s underlying cash flow for the full-year came in at $20.3bn, compared with $32.8bn for 2014, a relatively modest fall of 38%.
Cost cuts and one-off charges
As BP is being forced to adapt to the lower oil price, the company is taking some hefty restructuring and impairment charges, which made up the majority of the company’s loss for the fourth quarter. Indeed, during the three-month period, the company’s upstream segment reported non-operating net impairment losses of $1.6bn. And cumulative restructuring charges from the beginning of the fourth quarter of 2014 totalled $1.5bn by the end of 2015.
Management is forecasting a further $1bn of restructuring charges for 2016 as the group cuts costs further. The company is now expecting to cut an additional 4,000 upstream jobs and 3,000 downstream jobs by the end of 2017. Total restructuring charges are expected to be $2.5bn by the end of 2017.
And while these restructuring charges may seem hefty at first glance, BP is already saving billions from a lower cost base. Controllable cash costs in 2015 were $3.4bn lower than in 2014 and are on track to be close to $7bn lower in 2017.
Not that bad
At first glance, BP’s fourth-quarter and full-year 2015 results look dismal. However like all oil producers, BP is currently going through a transition as it adapts to lower oil prices. Restructuring and impairment charges are now commonplace for the whole oil sector and BP is no exception.
Still, BP has today announced that the company’s dividend is here to stay for the foreseeable future and with a gearing level of only 21.6%, the company can afford to keep this promise. What’s more, BP’s cost savings are shaving billions from the company’s annual cost base, which should help maintain the group’s cash flow and accelerate a return to profit if oil prices return to their 2011 highs.
So overall, BP had a rough 2015 but the company’s long-term outlook remains bright, and the group’s 7.5% dividend yield looks safe for the time being.
