Oil giant BP (NYSE:BP) reported first-quarter 2020 earnings on Tuesday, April 28, and -- as you might expect -- it was bad.
During a quarter that saw an oil price war collapse crude prices and a worldwide pandemic destroy demand, BP's "underlying replacement cost profit" (basically, adjusted net earnings) tumbled to just $791 million, down from $2.4 billion a year ago.
While that sounds terrible, it was actually better than many analysts were predicting. As a result, shares bounced around in morning trading, and were down less than 1% at noon on Tuesday. However, there were other key takeaways from the earnings report that could indicate how other oil companies will fare this earnings season.
By the numbers
|Metric||Q1 2020||Q4 2019||Q1 2019||% Change (YOY)|
|Revenue||$59.7 billion||$71.1 billion||$66.3 billion||(10%)|
|Net income (loss)||($4.4 billion)||$18 million||$3.0 billion||N/A|
|Earnings (loss) per ADS (diluted)||($1.30)||$0.01||$0.87||N/A|
|Adjusted net income (loss)||$791 million||$2.6 billion||$2.4 billion||(67%)|
|Adjusted earnings per ADS (diluted)||$0.24||$0.76||$0.70||(65.7%)|
Analysts were expecting adjusted earnings per American Depository Share of $0.28, but given the turmoil in the oil industry, the market shrugged off the near miss, especially since BP maintained its dividend payout of $0.105 per share.
It's worth noting that Q1 was mostly over before the Saudi Arabia-Russia price war triggered a collapse in oil prices (early March) and before coronavirus had a major effect on fuel demand (mid-to-late March). That explains why revenue was only off by 10% year over year.
The primary reason for the massive $4.4 billion unadjusted net loss was $3.7 billion in inventory holding losses. Those were the result of the big change in oil prices during the quarter: BP's inventory was worth substantially less at the end of March than it was at the beginning of January.
What happened during the quarter
In a nutshell, pandemonium ensued.
If you've been following the news at all, you already know most of the major items affecting BP during the quarter -- the effects of COVID-19 on fuel demand, the effect of the Saudi Arabia-Russia oil price war, and then the subsequent OPEC+ agreement on production limits for May, and industrywide capital and operational cost cuts.
In response to these developments, BP announced it had opened a new $10 billion revolving credit facility, bringing its total liquidity to $32 billion as of March 31. Since then, the company has issued about $7 billion of new bonds in April. Its net debt increased by about $6 billion in Q1, to $51.4 billion. That's to be expected, and the company is likely to take on even more debt before all's said and done.
Like everyone else in the industry, BP announced cuts in its 2020 capital spending. Management now expects to spend about $12 billion, a 25% reduction from its initial projections. It expects this to have a minimal effect on production, anticipating a reduction of just 2.7% from 2019 levels.
What management had to say
Boy, did longtime CEO Bob Dudley pick the right moment to retire!
Dudley stepped down on Feb. 5, and was succeeded by Bernard Looney, who probably isn't exactly thrilled to have taken the reins just a month before a global crisis hit. In a statement, Looney reinforced that the company was first and foremost committed to protecting its employees and communities during the pandemic.
He left the operational comments to longtime CFO Brian Gilvary -- who is probably relieved to be heading into retirement himself on June 30. Gilvary said in a statement:
We are dealing with an exceptionally challenging environment and the unprecedented effects of demand destruction and price impacts that can be seen in these results are expected to continue through the second quarter.
Despite this our underlying businesses performed well in the first quarter, although our headline results were impacted by foreign exchange as well as price effects at the quarter end. We have developed a clear plan and are confident in increasing resilience in our financial framework through a set of interventions focused on building liquidity, strengthening our balance sheet and reducing expenditure to drive our cash balance point below $35 per barrel in 2021.
Unsurprisingly, BP didn't commit to providing any sort of hard numbers, given the uncertainties in the global economy in general and the oil industry in particular.
Instead, it had this to say:
Looking forward, there remains an exceptional level of uncertainty regarding the near-term outlook for prices and product demand, particularly while many economies remain under lockdown. There is the risk of more sustained consequences depending on the efforts of governments and the public and private sectors to manage the health, economic and financial stability effects of the pandemic. ... It is difficult to predict when current supply and demand imbalances will be resolved and what the ultimate impact of COVID-19 will be.
Things are bad in the oil industry, but oil majors like BP are well-positioned to make it through the current crisis while maintaining their dividend payouts. For BP in particular, rising debt is a concern: Its debt load is currently 36.2% of equity, above the company's target 20%-30% range, and is likely to climb higher.
However, as BP pointed out frequently in its earnings release, we're in uncharted waters here, and nobody knows exactly where we'll be in three months, much less by the end of the year. Energy industry investors should proceed with caution in the oil and gas sector.