Today I’m looking at the benefits — as well as the risks — of investing in BP (LSE: BP).
A failed accord
One story has consistently dominated the financial headlines in recent weeks, and that’s the prospect of the OPEC oil cartel — along with Russia — placing a freeze on current output to alleviate the pressure on bloated inventories.
Of course more action is required to get to grips with the chronic imbalance affecting the oil market, but the news was treated by optimists as a prelude to a potential production cut.
However, regional heavyweight Saudi Arabia blew this notion out of the water on Wednesday after oil minister Ali al-Naimi stated that any such reduction “is not going to happen, because not many countries are going to deliver, even if they say they will cut production.”
Given the vast political and economic complications over such a deal, it seems that the ongoing market share grab in the market still has a lot more ground to run, causing oil supplies to keep on rising.
Long-term recovery?
However, BP remains confident that an improving market balance should gradually send crude values stomping back towards previous highs, starting with a recovery in the latter part of this year.
The company said in its Energy Outlook this month that “2016 looks set to be another tough year for our industry,” before adding “we have faced similar episodes in the past and we know that the market will eventually rebalance.”
Indeed, the company said this month that it expects crude values to rise back to the $100 per barrel marker in the coming years, driven by robust demand for fossil fuels. BP reckons these fuels will still provide 80% of the world’s energy needs by 2035.
Costs coming down
In the meantime BP has vowed to undergo further cost-cutting to protect the balance sheet, not to mention create a more efficient, earnings-generating entity for the years ahead.
The oil leviathan says that full-year organic capital expenditure for 2016 will register “at the lower end of the range of $17bn-19bn,” down from $18.7bn in the previous year and $22.9bn in 2014. And BP intends to cut a further 7,000 jobs from its workforce by the close of 2017.
Disappointing demand set to weigh?
But the prospect of prolonged demand weakness means that BP may need to embark on further capex cuts and other cost-saving measures to stay afloat, a worrying prospect for future earnings growth.
The impact of a cooling Chinese economy was underlined by the country’s latest trade data, which showed crude imports down 4.6% year-on-year in January to 26.69m tonnes. Sure, imports may have reached record highs in December, but this can be put down to bargain hunting rather than an indication of robust underlying demand.
Expectations of prolonged economic deceleration in China are widely held, meaning that crude values are in severe danger of remaining subdued for some time yet. And should BP’s predictions of an oil-and-gas-dominated world in the decades ahead prove wide of the mark, any chance of a long-term price recovery will also likely be put to the sword.
