If there were any lingering doubts that big oil producers can't deliver solid returns in a lower oil price environment, BP (NYSE:BP) certainly put those doubts to bed with another estimate-busting fourth-quarter result. No longer floundering, the oil giant delivered higher profits per barrel and produced double-digit returns on capital employed.
Let's take a look at the company's most recent earnings results, what management has in store for the rest of 2019, and why these results could be a prelude to even better things in the coming years for BP investors.
By the numbers
|Metric||Q4 2018||Q3 2018||Q4 2017|
|Revenue||$76.88 billion||$80.8 billion||$70.02 billion|
|Net income||$771 million||$3.40 billion||$63 million|
|Earnings per ADS (U.S. GAAP)||$0.23||$1.00||$0.01|
|Operating cash flow||$6.82 billion||$6.09 billion||$5.90 billion|
As is so often the case, BP's bottom-line result had some non-cash charges that impacted its reported net income. Most of these charges related to how oil inventories are treated under fair value accounting standards. Absent these charges, BP reported a replacement cost profit -- a number that adjusts for these accounting variations -- of $2.71 billion.
Notably, the company's upstream results were much higher in the fourth quarter even though oil prices declined significantly. Those declines were offset by much-higher natural gas price realizations and cost cuts across BP's production assets to lift per-barrel margins. Its downstream business also benefited from favorable refining margins in North America and several marketing deals that have expanded its network of retail stores.
- BP's fourth-quarter production checked in at 2.63 million barrels of oil equivalent per day. Compared to prior quarters, it's a modest increase -- about 1.8% higher than last year. The company disposed of several upstream assets during the past year, though. Adjusting for these, production grew by 3.4% for the quarter and 8.2% for the year.
- Compared to prior quarters, this one was light on the completion of new projects. BP announced first oil from its Clair Ridge platform in the North Sea.
- The most recent quarter and the weeks leading up to this release were chock-full of new-project announcements. BP gave the green light to expand its Trinidad natural gas production, build a new floating liquefied natural gas facility off the coast of Senegal and Mauritania, expand its Atlantis facility in the Gulf of Mexico, and increase petrochemical production at its South Korea plant.
- BP also announced it was exploring a new petrochemical facility in Turkey, a new production platform off the coast of Angola, and a new exploration license adjacent to the giant Khazzan gas project in Oman.
What management had to say
The one-two punch of the Gulf of Mexico oil spill and the price crash in 2014-16 led BP to take several of its development projects back to the drawing board with the objective of cutting costs and decreasing break-even prices. So far, those efforts have paid off handsomely. In the company's conference call, Bernard Looney, chief executive of upstream operations, described how redesigning these projects has significantly lowered costs and has led to returns much higher than anticipated:
Moving to our projects, we remain on track to add 900,000 barrels a day of oil equivalent from our new major projects in 2021. Twenty of these projects have been delivered, including the start-up in January of the Anadarko [Petroleum]-operated Constellation project in the Gulf of Mexico, and we have 15 to go.
With the recent sanction of Atlantis Phase 3 in the Gulf of Mexico and Cassia Compression in Trinidad, all of the projects needed to deliver this plan have passed through the final investment decision gate. We expect to deliver this plan with around $15 billion, or 25%, less capital than we envisaged when we first set out our plans.
As well as 35% higher cash margins, these projects are expected to have at least 20% lower development cost than the base business had in 2015.
BP's future looks better than it has in over a decade
BP's management has done a commendable job over the past several years finding ways to operate more cost-effectively. It wasn't that long ago that BP's ambitious growth plans looked to be built on rather high future oil prices. Nowadays, it expects to deliver all of these projects profitably with oil remaining around $55 per barrel over the next several years. It also helps that the amount the company expects to spend on the Gulf of Mexico spill will decline significantly in the coming years.
With a break-even price that low, close to a million barrels per day of new production slated to go live over the next couple of years, and a downstream portfolio that's turning out reliable results, BP's business looks more attractive than it has in a long time. With shares trading at 16 times earnings, it may be worth taking a look at this stock.