Despite BP’s Q2 profit slide and the uncertain oil price picture going forward, the firm remains positive and is taking proactive measures to manage costs.
“Work to reset capital and cash costs is now moving fast, and works towards our focus on rebalancing our financial framework to manage through a period of low oil prices, while sustaining our dividend as the first priority within that framework,” said BP CEO Bob Dudley.
“It is a challenging time for our industry but I remain confident that moving quickly to simplify and reset the company for a sustained weaker environment is the right thing to do for all seasons,” said BP CEO Bob Dudley.
“We are staying focused on operational delivery, working steadily to complete our planned divestments, and resetting capital and cash costs in a way that drives sustainable efficiencies. This supports our efforts to rebalance our sources and uses of cash and ensure we can sustain our dividend.
“We also recognise that we have found a realistic path to closure on the largest remaining legal exposures in the Gulf of Mexico – removing this legal overhang and uncertainty allows us to focus on our future.”
This progress has lead Liberum’s oil & gas research department to issue a ‘hold’ rating for BP.
“The settlement agreement on Deepwater Horizon means less anxiety for shareholders but will require an extra circa-$1bn cash outflow every year,” they said. “After the recent sell-off, the valuation does not look particularly demanding, in our view, which could offer an opportunity to revisit the shares.”
Riley added: “Energy equities are currently reflecting an oil price of around $65 per barrel. If the price settles at around $75, there could be upside of 30-40%, whereas $90-plus would see upside of 90-100%. The sector has roughly halved in the past 12 months, and taking that into account a doubling in value is in order.”
However, Stanojevic is sceptical on the prospect of upside, and believes that energy firms will be carrying a discount for the foreseeable future.
“Some of these big companies need $80-90 a barrel to meet their cost of capital, and in an oversupplied market you would have to be bullish to see the price doing that,” he said.
“These companies are on discount valuations, and nothing is going to change that in the medium-term. They are addicted to CAPEX – they will keep spending what they have until the oil price recovers and the CAPEX deployed will not be in line with the cost of deploying that CAPEX.”
The fall has been agonising and the landing a bumpy one, if indeed it is a landing but the expectation seems to be that prices will eventually have to rise.
That said, energy firms may have to ready themselves for more pain.
