BP Racks Up $6 Billion in New Debt in Three Months Amid Pandemic -- Update
April 28 2020 - 10:03AM
Dow Jones News
By Sarah McFarlane
BP PLC said debt rose sharply and warned of falling production
and a worsening outlook for refining margins, offering a first look
at how the new coronavirus pandemic is straining the balance sheets
of the world's largest oil companies.
The London-based energy giant, the first oil major to report in
the current earnings season, reported a replacement cost loss -- a
metric similar to the net income figure that U.S. oil companies
report -- of $628 million for the three months ended March 31, from
a profit of $2.1 billion for the year-earlier period. BP's net debt
rose $6 billion to $51.4 billion from the fourth quarter, as oil
prices fell 60% in the three months to end-March.
Analysts said that BP had preserved its dividend of 10.5 cents a
share by pulling other levers such as cutting costs and investment
plans.
But BP's high debt to equity ratio and $8.4 billion annual
dividend are outsized in the context of the company's cash flows
and investments due to the lower oil price, said Christyan Malek,
head of oil research for Europe and the Middle East at
JPMorgan.
"I think the next quarter, they will have to resolve it through
additional measures such as more divestments and, or, a review of
their dividend policy, assuming oil demand stays under
pressure."
Lockdown restrictions to slow the spread of Covid-19 devastated
global demand for oil during the January-March period, prompting BP
and many of its peers to slash costs, shelve buyback plans, or cut
dividends and seek extended credit from banks.
Those are the challenges facing Bernard Looney as he presided
over his first set of results as BP's chief executive, after taking
up the post in February. Analysts expect the industry's results for
the April-June period to be hit even harder, since many lockdowns
didn't begin until March.
"The pandemic only adds to the challenge of oil in the future,"
said Mr. Looney on Tuesday. As more consumers in the industrialized
world grow accustomed to working from home and traveling less,
there is a real possibility that some behavioral changes will
stick, he said. "Therefore the question has to be, will consumers
consume less and I think there's a real possibility of that."
BP has slashed spending by $3 billion or 25%, and cut costs by
$2.5 billion, in response to the collapse in oil prices and the
pandemic. Its peers including Royal Dutch Shell PLC and Exxon Mobil
Corp. have taken similar steps. Benchmark Brent oil prices have
lost around two-thirds of their value since the start of the year
to trade around $22.50 a barrel.
The company's gearing -- the ratio of net debt to the total of
net debt and equity -- rose to 40% including leases, from 35% in
the previous quarter. The company targets 20%-30% gearing but
expects the level to remain above 30% into 2021.
"Over time you would expect that gearing to come back into the
range that we've seen in the past but it did rise in the first
quarter," said Mr. Looney in an interview with The Wall Street
Journal on Tuesday.
At the end of the first quarter, BP had around $32 billion
liquidity available, including a new $10 billion revolving credit
facility or RCF. The company also issued around $7 billion in bonds
in April.
Mr. Looney said that the company hadn't drawn on the RCF.
Oil and gas production for the first quarter fell 2.9% to 2.58
million barrels of oil equivalent a day, compared with the same
period a year ago. BP expects production to fall further in the
second quarter with uncertainty around cuts by The Organization of
the Petroleum Exporting Countries and its allies.
The company said it also expects refining margins to be lower in
the second quarter and that less of its refining capacity would be
used as the coronavirus continues to sap global oil demand.
"In recent weeks we have seen our retail fuel volumes in North
America and Europe fall by around 50% and demand for aviation fuel
in our key markets fall by around 80%," said the company in its
earnings statement.
BP's shares were 1.3% higher on Tuesday.
The company maintained its dividend at 10.5 cents.
"The maintenance of the dividend was a strong signal of
confidence from management but one which may turn out to look like
hubris in retrospect, " said Colin Smith, analyst at Panmure
Gordon.
Write to Sarah McFarlane at sarah.mcfarlane@wsj.com
(END) Dow Jones Newswires
April 28, 2020 09:48 ET (13:48 GMT)
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