A lot of investors were probably expecting BP's (NYSE:BP) earnings results were going to be less than stellar. But I don't think a lot were anticipating the company would post a $6.2 billion loss this past quarter. That number is more like sticker shock than anything else, though, because so much of it has to do with the massive writedown it took on the Deepwater Horizon oil spill. So, let's drill down a little deeper into the numbers for this quarter to see how much that massive loss number masked the company's operational numbers.
By the numbers
|BP Results (quarterly)||Q2 2015||Q1 2015||Q2 2015|
|Revenue||$60.5 billion||$54.1 billion||$91.7 billion|
|EBITDA||($4.2 billion)||$5.9 billion||$9.1 billion|
|Normalized Diluted EPS||($0.29)||$0.08||$0.18|
|Operational Cash Flow||$6.28 billion||$1.86 billion||$8.23 billion|
The one thing that you need to keep in mind when looking at BP's earnings this quarter is that it took some massive noncash settlements, including $10.7 billion related to Deepwater Horizon spill settlements and another $600 million related to its Libya operations. While BP will need to make cash payments for the settlement over time, this was simply a writedown of the current earnings and not an actual cash payment. This is why in the table above you see that the company generated positive operational cash flow and negative EBITDA at the same time.
As anyone should have expected, the rapid decline in oil prices took its toll on BP's earnings once again. This quarter's price realization of $56.69 per barrel was a slight improvement from the previous quarter's $46.79 per barrel, but unfortunately it was offset by a decline in its realized natural gas prices. On a barrel of oil equivalent basis, the average price realization climbed only 8%.
Just like last quarter, though, the one thing that helped to keep BP's income statement from completely falling off a cliff was its refining segment. Operational profits from its downstream operations improved 75% to $1.62 billion compared to the same quarter last year. But it's only a consolation price when upstream profits have declined a whopping 94% over the past year.
The most encouraging number from this past quarter was its operational cash flow. There are a couple of favorable working-capital changes baked into that $6.3 billion cash flow number, but it was a vast improvement compared to last quarter's $1.8 billion. This bump in cash flow allowed the company to cover all its capital expenditures for the quarter, pay its dividend, and even shave off a small amount of its total debt load. It may be only a fleeting victory for the company's financial statements, but in today's oil market any victory should be celebrated.
A slimmed-down outlook
Based on the statements from CEO Bob Dudley and some of the moves the company has made, BP is really hunkering down for a long slog of low oil prices. As Dudley put it in the official company release:
The external environment remains challenging, but BP moved quickly in response and we continue to do so. Our work to increase efficiency and reduce costs is embedding sustainable benefits throughout the Group and we continue with capital discipline and divestments.
What capital discipline translates to is operational cost cuts and yet more reductions in capital expenditures. In the first half of 2015, operational expenses have been cut by $1.7 billion compared to last year. It should be noted, though, that it has taken about $450 million in nonoperational restructuring costs to realize that benefit, so it's not as great as it sounds.
Management also noted that it had slightly revised its capital expenditure outlook for the year to be below its $20 billion estimate from the beginning of the year. So far in 2015, the company has spent just under $9 billion. So, if spending levels were to remain where they are, we can expect BP to spend somewhere in the $17-$19 billion range for 2015.
What a Fool believes
This quarter isn't quite as bad as the headline numbers suggest, although this quarter's financial statement isn't exactly the one that gets hung up on the refrigerator, either. BP is controlling what it can by cutting costs and lowering capital expenditures, but that can only help so much when the price for its primary revenue source has been cut in half. The biggest question going forward for BP is whether the cuts it's making to capital expenditures will come back to bite it further down the road. Perhaps there will be some clues as to how these capital spending changes will shake out in the coming quarters.
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