With the current slide in the crude oil prices since June of this year, oil companies have been feeling the heat, and oil giant BP PLC (BP, Financial) also had to bear the brunt of declining oil prices which has created a hole in its top and bottom lines for the past quarter. In the third-quarter results the profit and revenue were both hit hard by a decline in oil prices. The oil honcho urges to maintain a decent top and bottom line irrespective of such headwinds that it faces even in the days ahead. Let’s take a sneak peek to understand why BP is exhibiting a disciplined approach of cost management through the restructuring program, and let us also have a glance on some of the details shared by the top bosses on the program per se. Here’s the overall story.
The dismal quarter numbers said it all
Though BP suggested that its quarterly numbers did beat analysts’ expectations, revenue for the third quarter fell from $96.6 billion last year to $93.9 billion, reflecting a decline in prices received in most of the categories of its oil and gas output. During the three months of the third quarter, Brent averaged $102 a barrel, down from nearly $110 the previous quarter and over $110 in the same period last year.
The management also gave a note of caution that, as oil prices have slid substantially during the year, the oil major might face sharper declines in profits in the final quarter of the year.
As the oil major restrains from spending on new projects and is trying to control costs in response to investor pressure, the management announced during the third quarter earnings call that it expected capital expense for the full year to be about $23 billion, undershooting previous guidance of $24-$25 billion.
Restructuring measures announced lately
BP announced a $1 billion restructuring program on December 10, as per which it would adopt aggressive cost-cutting measures to reduce the impact of the present slump in oil prices on its bottom line. According to the announcement made lately, BP would cut thousands of jobs on a global basis in its oil and gas line of business by the end of the coming fiscal year.
The British oil major has further added that it would be considering deeper cuts to its 2015 budget beyond the $1-$2 billion reduction already announced in October, as a result of the free fall in oil prices.
In fact, the bulk of the restructuring costs will go towards staff redundancies in all segments, including oil exploration and production, refining and trading and administration. While speaking on the restructuring plans, the company said, “We expect the group to incur about $1 billion of non-operating restructuring charges over the next five quarters, including the current quarter…”
Also the company shared the details on some large projects stating that the oil and gas exploration projects worth more than $150 billion would be put on hold next year as plunging oil prices render them uneconomical as per recent data.
Such changes are part of the company’s move to downsize and simplify its operations following the $43 billion worth of divestments since the 2010 Gulf of Mexico oil spill.
The head of BP’s upstream business, Lamar McKay, said that price volatility was inherent to the oil business and said that costs, which tend to lag price developments by 12 to 18 months, should fall in due course, helping to maintain profitability.
Parting thoughts
With the price of benchmark blend of crude testing a new five-year low on Wednesday, at $62.55 a barrel, BP is not the only oil major rethinking on its business plan in the new price environment. Even ConocoPhillips Inc. (COP, Financial), the U.S.’s third-largest producer has recently slashed its investment budget for next year by around $3 billion and has decided to defer its large projects. Hence, BP has taken the correct action at the right point of time in order to maintain its top and bottom lines at a decent level in the coming quarters.
