To what extent can BP plc (ADR) (NYSE:BP) distinguish itself from its competitors amid prolonged weakness in oil prices? More specifically, can the energy major make enough money to reignite BP stock?
These are two of several questions investors hope to have answered when the British oil giant reports second quarter 2017 earnings results before Tuesday’s opening bell.
Although BP stock — down 5.9% year to date — hasn’t caught the spark that investors have hoped, management continues to make the right moves and have re-balanced the operation, while reducing expenses to keep the company profitable.
Offsetting Weak Oil Prices
Investors are hoping the company has done or will do enough in the future to offset prolong weakness of oil prices, which remain under pressure due to global oversupply concerns. Lower oil prices could hit BP’s upstream earnings, but there’s also the strong downstream segment to rely on. On Tuesday, analysts will want to see the extent to which the company’s profit margin improvements can boost the bottom line.
Likewise, investors will focus on the company’s guidance to gauge what it expects to achieve from various projects in the second half of the year. Regardless of what Tuesday’s numbers come out to be, BP — along with peers Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) — remains best-of-class in energy names.
And from my vantage point, investors who are looking for a top energy pick for the next 12 to 18 months should can do well buying BP stock ahead of the results.
What to Expect
For the three months that ended June, Wall Street expects BP to earn 18 cents a share on revenue of the $48.9 billion. This compares to the year-ago quarter when the company earned 24 cents per share on $46.4 billion in revenue.
For the full year, ending in December, earnings are projected to rise 90% year-over-year to $1.60 per share, while full-year revenue of $214.1 billion would be a 17% decline YOY.
The company’s upstream business will be a key focus. In the first quarter, that segment reversed last year’s loss into a profit of $1.4 billion. As such, Wall Street has grown more favorable of BP’s prospects, given that, when compared to last year, there has been a significant pricing improvement in both oil and natural gas. This would explain the strong forecast for full-year profits.
Likewise, the downstream business, thanks to improvement in refining margins, will also be profitable. But in the first quarter, downstream earnings fell 4% year-over-year to $1.7 billion, driven by higher turnaround activities during the quarter.
The question, though, is to what extent was BP, which forecast flat sequential production, able to meet its cost-cutting initiatives amid increased turnaround activities and maintenance works?
While the price of Brent Crude has crept up towards the $50 per barrel level, the price has fallen on a quarter-over-quarter basis. And BP has noted that a price change of $1 per barrel can effect its pre-tax operating profit by $500 million annually.
But here’s the thing: That’s been the case for almost two years. And BP — thanks to its improved cost structure — is still projected to grow earnings by 90% this year and by 46% in fiscal 2018.
Bottom Line for BP Stock
BP’s ability to make the best out of a bad situation remains encouraging and is one of several reasons to remain long. Plus, unlike weaker-operating competitors, BP is able to capitalize on a thriving refining business.
The company will continue benefit from its strategy to exit non-core upstream assets, which not only will strengthen its portfolio, but also reduce risks caused by prolonged weakness in oil price.
From my vantage point, the company’s focus on cutting costs and strengthening its portfolio, combined with the prospects of higher margins in its upstream business in the quarters ahead makes BP shares a strong bargain.
That, combined with a 6.8% annual dividend yield — versus the 2% average yield of the S&P 500 Index — make BP stock a top energy pick for the next 12 to 18 months.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
