BP plc (NYSE: BP) released first-quarter earnings on April 28, and the results were about as bad as one would expect, given the massive decline in oil prices during the past year. The oil crash was bound to take an inevitable toll on Big Oil earnings this quarter.
Still, BP showed resilience in the midst of a brutal operating climate. BP remained profitable, thanks once again to its integrated model. The benefits of the integrated operating structure are clear, as weakness in oil exploration and production was partly offset by improved refining performance.
Importantly, BP management reiterated its commitment to the dividend. This was a critical vote of confidence that investors needed to hear, since BP's hefty 5.9% yield is perhaps the biggest reason to own the stock.
Here are the major takeaways from BP's earnings report.
Nowhere to hide
As previously mentioned, it was abundantly clear that this earnings report was going to be bad. Indeed, first-quarter profit fell 18%, to $2.6 billion. Not surprisingly, the upstream business crumbled under the weight of the nearly 50% drop in oil prices during the past year. Upstream profits collapsed 86% year over year. Fortunately, some of this was offset by downstream, where profits more than doubled, to $2.2 billion.
BP, like the other integrated majors, is getting a big boost from downstream. That's because refining profits tend to improve when oil prices are volatile. A rapid decline in oil prices, like the one that has taken place, actually causes refining spreads to widen, which increases margins.
Separately, BP was aided by a $200 million profit from its nearly 20% investment stake in Russian energy giant Rosneft.
Overall, BP's results handily beat analyst estimates. Revenue fell 41% year over year, to $54.2 billion, but that topped projections by nearly $3 billion. Diluted earnings per share clocked in at $0.14, which was actually double what analysts expected.
The dividend is secure
Along with earnings, BP management took the opportunity to assure investors that the company would do everything possible to maintain the dividend. BP stated that its first priority within its financial framework is the dividend.
One reason for the company's ability to maintain the dividend is its aggressive cost-cutting measures. BP is selling off a considerable amount of assets deemed non-critical to the company's future. BP is about $7 billion through a $10 billion divestment program, to be finished by the end of this year. In addition, BP is lowering capital spending this year. The company expects to utilize $20 billion on capital expenditures, down significantly from prior guidance of $24 billion-$26 billion.
Going forward, the critical test for the dividend will be the outcome of the civil trial stemming from the 2010 Gulf of Mexico oil spill. BP is on the hook for as much as $13 billion in additional financial penalties under the Clean Water Act, depending on whether the company is found grossly negligent, as well as the exact calculation of the amount of oil that spilled into the Gulf. For what it's worth, BP maintains a provision for $3.5 billion, and stuck to that forecast.
If the penalty is close to what BP expects, the dividend should not be at risk. BP's operations provide enough cash flow to secure the dividend. Really, the only things that could threaten BP's dividend appear to be another steep crash in the price of oil, or a significantly worse-than-expected outcome of the civil trial. Barring one of those two events, investors can continue to count on BP's juicy 5.9% dividend yield.