BP PLC (LSE:BP, Financial)(BP, Financial), also referred to by its former name, British Petroleum, delivered its fourth-quarter and full-year fiscal 2016 results in February. The $108 billion London-based oil giant reported 17.4% sales decline to $186.6 billion. The company also delivered a $115 million profit compared to $6.5 billion losses in 2015.
As observed, BP recorded small profits despite 20% reduction in overall pre-tax expenses. In fact, the oil company reported $430 million operating losses prior to taxation, finance costs and pension benefits.
BP CEO Bob Dudley commented on the company's growth and progress in 2016.
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"We launched six major project start-ups - from Algeria to the Gulf of Mexico - and made final investment decisions on a further five major projects. And we see exciting opportunities ahead," Dudley said.
"We have delivered solid results in tough conditions - and are well prepared for any volatility in oil pricing. We have adapted by cutting our controllable cash costs by $7 billion from 2014 - a full year earlier than planned. Continued tight discipline on costs remains essential. Everything we have done during the year has made us a more resilient and competitive company.
With our Deepwater Horizon financial liabilities now substantially behind us, BP is fully focused on the future. You have seen that focus in the string of strategic portfolio additions during the last two months of the year. From increasing gas interests and renewing long-term, low-cost oil to expanding our retail operations - these investments will generate significant long term value for our shareholders. We start this year with considerable momentum - and a sense of disciplined ambition. We have laid the foundations for BP to be back to growth."
BP's shares fell 4.02% post-earnings release.
Outlook
Brian Gilvary, BP chief financial officer, said, "Looking beyond this year, we expect organic free cash flow to grow into the medium term, supported strongly by the ramp-up of production from new upstream projects, strong marketing growth and the positive impact of these portfolio additions."
Capital expenditures
Further, organic capital expenditure is now expected to be $16 to $17 billion in 2017, including estimated additional organic capital spending associated with the portfolio additions.
In comparison, BP recorded an organic capital expenditure of $16 billion in 2016 and $18.7 billion in 2015.
Disposal proceeds
BP also expects its disposal proceeds to be in the range of $4.5 to $5.5 billion. Figures were $2.8 billion and $2.6 billion in fiscal years 2015 and 2016, respectively.
Total return
BP shares underperformed the broader S&P500 index in both short- and long-term periods. BP had 16.3% total return versus S&P500’s 19.1% in the past year, according to Morningstar data. BP returned losses to its shareholders in the past five years, nonetheless, with -0.49% versus S&P500’s 13.5%.
Valuations
BP shares trade at a rich premium compared to its peers. According to GuruFocus data, BP had a trailing price-earnings ratio of 463 times versus an industry median of 17.1 times, price-book value of 1.15 times versus an industry median of 1.14 times and price-sales ratio of 0.63 times versus an industry median of 1.02 times.
BP also carried a 7% trailing dividend yield with 0% payout ratio—brought by losses instead of profits.
Using Reuters data, BP would have respective 2017 forward sales and price-earnings multiples of 0.48 times and 15 times.
BP PLC
BP was founded 108 years ago, having Anglo-Persian Oil Co., Castrol, Standard Oil of Ohio, ARCO and Amoco as predecessors.
In 2016, BP derived 34.8%, or $68.8 billion, of its sales—excluding any adjustments—from the United States and 65.2% from all other countries.
Previously, BP had three reportable segments: Upstream, Downstream and Rosneft.
(Fourth Quarter Results and 20-F, BP)
Upstream
As per company filings, upstream’s activities include oil and natural gas exploration, field development and production, midstream transportation, storage and processing and the marketing and trading of natural gas, including liquefied natural gas (LNG), together with power and natural gas liquids (NGLs).
In 2016, upstream sales declined by 23.2% to $33.2 billion, or 17.8% of total sales, and delivered a profit before interest and taxation of $634 million compared to losses of $967 million in 2015.
(Fourth Quarter Results and 20-F, BP)
Downstream
Downstream’s activities include the refining, manufacturing, marketing, transportation and supply and trading of crude oil, petroleum, petrochemicals products and related services to wholesale and retail customers.
In 2016, downstream sales fell by 16.4% to $167.7 billion, or 90% of total BP sales, and delivered 4% profit before interest and tax margin compared to 2.6% the year prior.
Rosneft
According to filings, the Rosneft segment results include equity-accounted earnings arising from BP’s 19.75% stake in Rosneft as adjusted for the accounting required under IFRS relating to the purchase of its interest in the company and the amortization of the deferred gain relating to the disposal of its interest in TNK-BP back in 2013.
BP generated $643 million in its Rosneft stake in 2016, a decline from $1.3 billion in 2015.
Key metrics
Underlying replacement cost profit per ordinary share (cents)
As per filings, underlying replacement cost (RC) profit per share reflects the replacement cost of inventories sold in the period and is arrived at by excluding inventory holding gains and losses from profit or loss.
In 2016, BP had underlying RC profit per ordinary share of $13.79, a 57% decline from $32.22 in 2015.
Gearing (net debt ratio)
Gearing is calculated by dividing net debt by total equity plus net debt. BP aims to keep its gearing around 20% to give it the flexibility to deal with an uncertain environment.
Gearing ratio rose to 27% in 2016 versus 21.6% in 2015.
Refining availability (%)
Refining availability shows the percentage of the year a unit is available for processing after deducting the time spent on turnaround activity and all mechanical, process and regulatory downtime.
This metric, according to BP, is an important indicator of the Downstream segment's operational performance.
Refining availability improved to 95.3% in 2016 compared to 94.7% in 2015.
Reserves replacement ratio (%)
Proved reserves replacement ratio is the extent to which the year’s production has been replaced by proved reserves added to our reserve base. Further, this measure helps to demonstrate BP’s success in accessing, exploring and extracting resources.
Reserves replacement ratio was at 109% in 2016 compared to 61% in 2015. The 109%, according to BP, included the impact of the oil company’s Abu Dhabi concession renewal. Further, BP became a 10% shareholder in the Abu Dhabi Co. for Onshore Petroleum Operations Ltd. as a result.
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“More recently, we were awarded a 10% interest in Abu Dhabi’s ADCO concession, which provides us with material long-term on-shore oil reserves, low-cost oil production and cash flows. These are resources that we already understand well, which will add resilience and production to our Upstream portfolio out to 2055.”
Sales and profits
(Fourth Quarter Results and 20-F, BP)
Gulf of Mexico response
(Fourth Quarter Results and 20-F, BP)
Cash, debt and book value
As of December, BP had $23.5 billion in cash and other investments and $58.3 billion in finance debt, with a ratio to equity of 0.6 times versus 0.54 times the year prior.
For the period, 11.2% of $263.3 billion in assets were goodwill and intangibles, while having a book value of $96.84 billion compared to $98.39 billion the year prior.
Cash flow
(Fourth Quarter Results, BP)
In 2016, BP’s cash flow from operations declined 44% to $10.7 billion. More cash outflow primarily took from impairments on sale of business and fixed assets, earnings from equity-accounted entities and movements in inventories and other current and non-current assets and liabilities. BP also recorded lower cash flow from net charge for provisions.
(Fourth Quarter Results and 20-F, BP)
In 2016, capital expenditures were $16.7 billion, leaving BP with free cash (out)flow of $6 billion compared to $485 million free cash flow in 2015. BP maintained impressive dividend payouts to its shareholders, including non-controlling, despite free cash flow volatility in recent years.
BP also halted its share repurchases in fiscal years 2015 and 2016, resulting in lowered payout levels.
(Fourth Quarter Results and 20-F, BP)
BP gathered much of its cash flow from disposals of businesses and fixed assets in recent years, even before the massive oil price decline that started in late 2014. In 2013, BP disposed of its 50% interest in TNK-BP to Rosneft, resulting in a gain on disposal of $12.5 billion.
Nonetheless, BP disposed another $2.6 billion of assets in 2016 and looks forward to a range of $4.5 to $5.5 billion in disposals in 2017.
(Fourth Quarter Results and 20-F, BP)
BP also took in a good amount of financing with $5.8 billion proceeds, net payments, in fiscal 2016.
Conclusion
Looking at BP’s business operations in recent years definitely paints an unattractive picture as a possible long-term investment. BP displayed poor business growth, has a more leveraged balance sheet and has sold assets to have more cash.
Meanwhile, BP’s recent arrangements with Abu Dhabi, including its merger agreement with Det Norske—with BP’s Norwegian North Sea portfolio—and expecting steady oil production moving forward could have attracted a fellow oil giant, ExxonMobil (XOM, Financial), to the British oil company (Investor’s Business Daily).
Despite this promising outlook, BP still has a total cumulative pre-tax charge for its Gulf of Mexico oil spill of $62.6 billion—or $44.1 billion after tax. The company sees this figure to be between $4.5 to $5.5 billion in fiscal 2017, $2 billion in 2018 and declining from then on.
BP expects for its financial frame to be balanced at around $60 per barrel of Brent crude by the end of 2017. Brent crude prices, unfortunately, tumbled down to $51.76 per barrel recently from the year’s high of $57.1 per barrel.
(BP ADR Share Price and Price-Book Ratio, GuruFocus)
In January, Societe Generale upgraded BPR ADR shares to buy. Nine analysts had an average price target of $38 a share—16.6 times fiscal 2017 earnings and a 10.9% increase from today’s share price of $34.28.
Using the three-year price-sales average of 0.43 times and sales losses of 21.56% give a value of $63.43 billion or $20 per share—nine times fiscal 2017 earnings.
In summary, BP shares are a hold with $30 a share value.
Disclosure: I have shares of ExxonMobil.
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