BP Profit Smashes Estimates on Eve of Giant Shale Oil Deal

(Bloomberg) -- BP Plc reported a surge in profit that smashed estimates, giving the company the confidence to fully fund its $10.5 billion U.S. shale oil deal with cash.

Key Insights

• Adjusted net income was the highest since 2012 and Chief Executive Officer Bob Dudley said the shale acquisition will “transform” the company’s position in the U.S. However, abandoning plans to fund part of the BHP Billiton Ltd. deal with shares leaves BP relying on oil prices remaining in their recent range.
• It will also mean gearing, the ratio of net debt to equity, will edge above the company’s target of 30 percent in the first quarter. BP will need oil prices to stay strong and execute its divestment plan.
• Proceeds from $5 billion to $6 billion of planned asset sales, announced in connection with the shale deal, will now be used to reduce debt. BP said gearing should fall back toward the middle of its 20 to 30 percent target range by the end of next year. It’s raised just $400 million from divestments so far this year.
• “Confidence in cash generation” is the main reason BP no longer plans to issue new shares to fund the purchase.

Market Reaction

• BP shares rose 4.1 percent to 557.1 pence as of 8:04 a.m. in London, the biggest jump in a year.
• RBC Capital Markets sees “continued earnings momentum both in the upstream and downstream,” analyst Biraj Borkhataria said in a note. “More importantly we expect cash conversion to improve this year.”

Know More

• Adjusted net income climbed to $3.84 billion in the third quarter from $1.87 billion a year ago. That beat even the highest analyst estimate of $3.23 billion.
• The reliability of BP’s refineries was the highest in 15 years, but that performance may not be repeatable due to maintenance at the Whiting plant in the U.S.
• Operating cash flow excluding Gulf of Mexico oil spill payments and including working capital for the quarter was $6.6 billion, unchanged from a year earlier.
• Oil and gas production of 3.6 million barrels equivalent a day was flat.
• Click here for more details on the earnings.

To contact the reporter on this story: Kelly Gilblom in London at kgilblom@bloomberg.net

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Helen Robertson

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