On BP plc (NYSE: BP) based on concerns about the company’s high debt relative to peers. We note that the company’s total debt/capital ratio, including lease liabilities, stands at 50%, well above the ratios of ExxonMobil (18%), Chevron (18%), and Shell (32%). We see BP’s high leverage as a disadvantage during a period of slower global economic growth and ‘lower-for-longer’ oil prices. We believe that the company’s less leveraged peers are better positioned to manage sharp swings in energy prices and weaker industry conditions.
The lower earnings were driven by weak refining margins, lower gas prices, reduced demand, and lower production. Sales fell 35% to $44.251 billion, below the consensus of $60.017 billion.
The average realized natural gas price was $2.56 per mcf, down 18% from 3Q19.
In the Downstream business, third-quarter earnings fell to $636 million from $1.883 billion in 3Q19. The average refining margin was $6.20 per barrel, down from $14.70 per barrel in 3Q19. Total refinery throughput was 1,587 thousand barrels per day (mb/d), down from 1,813 mb/d a year earlier. Refining capacity utilization was 96.2%, down from 96.1% in 3Q19.
The $18.7 billion settlement will be spread out over 18 years. Nearly two-thirds of the settlement will also be taken pretax, thus reducing the effective payout.
The settlement covers most of BP’s remaining liabilities from the accident, and brings the company’s total pretax spill-related charges to $66.691 billion. We view the settlement as a positive for BP as it reduces uncertainty about the ultimate financial impact of the spill. Gulf of Mexico oil spill payments were $142 million on an after-tax basis in 3Q20. Full-year payments are expected to be approximately $1.5 billion.
In response to challenging energy markets, mostly due to the coronavirus pandemic, BP has increased its liquidity position to $44 billion, helped by a new $10 billion revolving credit facility. In April, BP also issued $7 billion of new bonds.
EARNINGS & GROWTH ANALYSIS
BP reaffirmed its 2020 outlook during its 3Q conference call. It projects Upstream production of 2.6 million barrels. It also forecasts capital spending of $12 billion, down 25% at the midpoint of the range from its February 2020 guidance of $15-$17 billion. In 2019, capital expenditures were $15.2 billion.
FINANCIAL STRENGTH & DIVIDEND
Standard & Poor’s rating is A-/stable, while Moody’s rating is A1/negative and Fitch’s rating is A/stable.
On August 4, 2020, in conjunction with its 2Q20 earnings release, BP cut its annual dividend by 50% to $1.26 from $2.52. At the time of the cut, BP said that the decision reflected efforts to conserve capital in a weak energy market.
MANAGEMENT & RISKS
CEO Bob Dudley, 64, retired in March 2020. Mr. Dudley had been chief executive officer of the company since October 1, 2010 and had been with the firm for more than 40 years. He has been succeeded by Bernard Looney, 49, previously the CEO of the Upstream business.
Relative to peers, BP has substantially more exposure to Russia through its 19.75% stake in Rosneft. The stake in Rosneft could be a risk if political tensions with Russia escalate.
BP’s operations are fully integrated, consisting of upstream, transportation, trading, refining, petrochemicals, marketing and renewable energy. BP owns a 19.75% stake in Russia’s largest oil company, Rosneft.
As such, our rating remains HOLD.