BP debt rises again as Gulf oil spill payouts soak up profit
LONDON (Bloomberg) -- BP Plc’s net debt rose again in the first quarter, reaching the highest level in at least a decade as payments linked to the Gulf of Mexico oil spill countered an almost threefold jump in profit.
The increase in borrowing shows how BP’s commitments, which on top of dividends include billions of dollars in payments related to the 2010 spill, are preventing it from benefiting fully from crude’s recovery. Yet the company has pledged a return to growth after drawing a line under the penalties that followed the U.S. disaster.
“Debt will rise in the first and second quarters to cover the Gulf of Mexico payments,” Chief Financial Officer Brian Gilvary said Tuesday in a phone interview. Borrowings will “ease out” in the second half, he said.
BP’s gearing rose to 28% in the first quarter from 26.8% at the end of 2016. Net debt was $38.6 billion, the highest since at least 2007, according to data compiled by Bloomberg. Operating cash flow was $4.4 billion, or $2.1 billion following oil-spill payments.
BP’s gearing “has been of concern,” Jason Gammel, an analyst at Jefferies Group LLC, said in a Bloomberg Television interview. Nevertheless, its underlying cash generation and overall results were “very strong,” he said.
Profit adjusted for one-time items and inventory changes rose to $1.51 billion from $532 million a year earlier, exceeding the $1.21 billion average estimate of analysts. Competitors Exxon Mobil Corp., Chevron Corp. and Total SA also beat profit estimates last week, benefiting from oil prices that were more than 50% higher in the quarter than a year earlier.
“It was a robust and a good quarter to have under the belt,” Gilvary said. “If oil stays around $50 to $55 this year, we will be able to balance our cash,” he said, referring to the breakeven level at which the company can cover spending and dividends without borrowing.
Debt may be approaching a peak. BP paid out $2.3 billion to cover spill liabilities in the first three months of 2017, about half the expected $4.5 billion to $5.5 billion for the year. Cash flow from operations rose and the company predicts a further increase this year as new projects start, though oil’s rally has stalled.
BP climbed as much as 3% in London trading on Tuesday, and was up 1.8% at 450.25 pence as of 1:10 p.m. local time. The stock has dropped 12% this year compared with a 4.3% decline in the Stoxx Europe 600 Oil & Gas Index.
E&P, downstream
BP earned $1.37 billion in adjusted profit before interest and tax from its exploration and production unit in the quarter, compared with a loss a year earlier. Oil and gas output, including from its share of Russia’s Rosneft PJSC, rose 5% to 3.5 MMbpd. Income from refining, selling and trading fuels and petrochemicals slipped to $1.74 billion from $1.8 billion.
“BP’s twin engines of upstream and downstream are starting to rev,” said Oswald Clint, an analyst at Sanford C. Bernstein & Co., which has an outperform rating on the stock. While cash flow remains “impaired,” investors should “buy in ahead of the second-half volumes, margins and cash-flow inflection,” he said.
BP’s capital spending was $3.5 billion in the quarter and it paid out about $1.3 billion in cash as dividends. Although its $4.4 billion of cash from operations failed to cover that outlay, the company expects “a material improvement in operating cash flow from the second half,” Chief Executive Officer Bob Dudley said in a statement.
