BP PLC said debt rose sharply and warned of falling production and a worsening outlook for refining margins, offering a first look at how the new coronavirus pandemic is straining the balance sheets of the world’s largest oil companies.
The London-based energy giant, the first oil major to report in the current earnings season, reported a replacement cost loss — a metric similar to the net income figure that U.S. oil companies report — of $628 million for the three months ended March 31, from a profit of $2.1 billion for the year-earlier period. BP’s net debt rose $6 billion to $51.4 billion from the fourth quarter.
Lockdown restrictions to slow the spread of Covid-19 devastated global demand for oil during the January-March period, prompting BP and many of its peers to slash costs, shelve buyback plans, or cut dividends and seek extended credit from banks.
Those are the challenges facing Bernard Looney as he presided over his first set of results as BP’s chief executive, after taking up the post in February. Analysts expect the industry’s results for the April-June period to be hit even harder, since many lockdowns didn’t begin until March.
“The pandemic only adds to the challenge of oil in the future,” said Mr. Looney on Tuesday. As more consumers in the industrialized world grow accustomed to working from home and traveling less, there is a real possibility that some behavioral changes will stick, he said. “Therefore the question has to be, will consumers consume less and I think there’s a real possibility of that.”
BP has slashed spending by $3 billion or 25%, and cut costs by $2.5 billion, in response to the collapse in oil prices and the pandemic. Its peers including Royal Dutch Shell PLC and Exxon Mobil Corp. have taken similar steps. Benchmark Brent oil prices have lost around two-thirds of their value since the start of the year to trade around $22.50 a barrel.
The company’s gearing — the ratio of net debt to the total of net debt and equity — rose to 40% including leases, from 35% in the previous quarter. The company targets 20%-30% gearing but expects the level to remain above 30% into 2021.
“Over time you would expect that gearing to come back into the range that we’ve seen in the past but it did rise in the first quarter,” said Mr. Looney in an interview with The Wall Street Journal on Tuesday.
At the end of the first quarter, BP had around $32 billion liquidity available, including a new $10 billion revolving credit facility or RCF. The company also issued around $7 billion in bonds in April.
Mr. Looney said that the company hadn’t drawn on the RCF.
Oil and gas production for the first quarter fell 2.9% to 2.58 million barrels of oil equivalent a day, compared with the same period a year ago. BP expects production to fall further in the second quarter with uncertainty around cuts by The Organization of the Petroleum Exporting Countries and its allies.
The company said it also expects refining margins to be lower in the second quarter and that less of its refining capacity would be used as the coronavirus continues to sap global oil demand.
“In recent weeks we have seen our retail fuel volumes in North America and Europe fall by around 50% and demand for aviation fuel in our key markets fall by around 80%,” said the company in its earnings statement.
BP’s shares were 1.3% higher on Tuesday.
The company maintained its dividend at 10.5 cents.
“The maintenance of the dividend was a strong signal of confidence from management but one which may turn out to look like hubris in retrospect, ” said Colin Smith, analyst at Panmure Gordon.
Extracted from Morning Star