BP profit beats estimates even as fines boost debt

Kelly Gilblom 5/1/2018

LONDON (Bloomberg) -- BP Plc capped a shaky Big Oil earnings season on a more upbeat note, as shareholders reacted positively to the highest profit in years even as the continuing burden of oil-spill payments pushed debt higher.

The results show how investors in the London-based company are feeling the effects of two life-altering events. BP is still paying its way through the more than $65 billion of penalties following the fatal Deepwater Horizon catastrophe in 2010. Yet they’re also seeing some benefits from rising crude prices after a three-year industry downturn.

BP’s CFO Brian Gilvary said factors that reduced first-quarter cash flow -- increases in working capital and payments related to the oil spill from the Macondo well in the Gulf of Mexico -- would fade later in the year.

"We’ve reached the peak now for quarterly payments in terms of Macondo,” Gilvary said in a Bloomberg television interview on Tuesday. Debt will “come down as the year progresses, quarter on quarter, especially given where prices are today.”

BP rose 1.4% to 545.7 pence at 11:46 a.m. in London, its highest since May 2010 and the second-best performance on the Stoxx Europe 600 Oil and Gas index.

Cash flow from operations, excluding payments related to spill, was $5.4 billion in the first quarter. The company paid out $1.6 billion on a pre-tax basis for the Deepwater Horizon disaster, including a final $1.2-billion payment to the U.S. Department of Justice. Payments are expected to be just over $3 billion in 2018, weighted to the first half of the year.

Gearing, the ratio of net debt to equity, was 28%, an increase from 27% in the fourth quarter of 2017, BP said.

The spill payment in the first quarter was "$500 million more than I expected,” although that probably means the burden will be lower later this year, Redburn analyst Rob West said. “Cash flow was good but messy, with less cash tax paid than expected."

Though BP has worked through almost all of the 390,000 legal claims stemming from the 2010 explosion, the bill for its remaining claims unexpectedly jumped late last year. The company was forced to take a surprise $1.7-billion charge to net income in the fourth quarter because the cases that did remain were among the largest and most complex.

Adjusted net income for the first quarter was $2.59 billion, the highest since 2014 and beating analysts’ estimates of $2.12 billion.

“We have delivered another strong set of results” with rising output from major new projects, CEO Bob Dudley said in a statement. “We’re determined to keep delivering our operational targets and maintaining capital discipline while growing cash flow and returns.”

Investors are scrutinizing cash flow as an indication of Big Oil’s ability to pass on the rewards of higher prices through share buybacks. Royal Dutch Shell Plc generated less cash than analysts forecast in the first quarter and its shares were hammered after CFO Jessica Uhl said the company wasn’t yet ready to commence a $25-billion stock-repurchase program.

BP has chosen to return part of the windfall to investors by buying back stock issued in lieu of dividends during the downturn, spending $120 million repurchasing 18 million shares in the first quarter. Gilvary also raised the prospect of increasing dividends. He said the board would be ready to look at shareholder payouts as debt falls, especially in the second half of the year.

At the same time, Dudley has pledged to keep a tight rein on spending and costs. The company expects its capital-expenditure budget to fall into the lower end of its guidance this year, estimated at around $15 billion.

Related News ///