BP: Energy Stocks Stuck in a Rut Even as Profits Bounce Back
Energy shares have been the stock market’s worst performer this year, weighed down by slumping crude prices even as many oil-and-gas companies return to profitability.
BP Q1 earnings preview
BP is scheduled to report Q1 earnings May 2 pre-market with a conference call to follow at 08:30 am ET on the same day.
The largest integrated oil and gas companies are known as the 'supermajors.' They are also sometimes referred to as 'big oil.' There and six 'supermajors' and they include: ExxonMobil (XOM), Royal Dutch/Shell (RDS-A), BP (BP), Chevron Corp. (CVX), ConocoPhillips (COP), Total S.A. (TOT). When people refer to the 'Supermajors' (aka Majors), they are defining them as the largest non-state owned oil companies in the world.
Looking at last quarter, Reports Q4 (Dec) earnings of $0.13 per share, which was $0.03 worse than the Capital IQ Consensus of $0.04; revenues rose 3.7% year/year to $51.01 bln vs the $49.91 bln single analyst estimate.
Reported production for the fourth quarter, including BP's share of Rosneft's production, was 3,338 thousand barrels of oil equivalent per day (mboe/d), compared with 3,342mboe/d for the same period in 2015. For the full year, the reported production was 3,268mboe/d, compared with 3,239mboe/d in 2015.
Moving to its upstream segment...
Production for the quarter was 2,186mboe/d, 5.5% lower than the fourth quarter of 2015. Underlying production for the quarter increased by 1.8%, largely reflecting major project ramp-ups. For the full year, production was 2,208mboe/d, 0.5% lower than in 2015. Underlying production for the full year was broadly flat versus the same period in 2015.
And looking ahead to 2017, the co expects full-year 2017 underlying production to be higher than 2016. The actual reported outcome will depend on the exact timing of project start-ups, acquisition and divestment activities, OPEC quotas and entitlement impacts in its production-sharing agreements.
Separately ,the co expects sequential production growth... co is forecasting Q1 reported production to be higher than Q4 2016 reflecting the impact of the Abu Dhabi concession renewal.
Moving to its downstream segment...
The fuels business reported an underlying replacement cost profit before interest and tax of $417 million for Q4 and $3,727 million for the full year, compared with $888 million and $5,995 million for the same periods in 2015. The results for the quarter and full year reflect a significantly weaker refining environment as well as the impact from a particularly large turnaround at the Whiting refinery. These adverse impacts were partly offset by an increased fuels marketing performance driven by retail growth, higher refining margin capture in our operations and lower costs from simplification and efficiency programmes.
Looking ahead, the expects a similar level of refining margins and lower turnaround activity in Q1 versus Q4.
On its balance sheet, net debt at December 13, 2016 was $35.5 billion, compared with $27.2 billion a year ago. The net debt ratio at December 31 2016 was 26.8%, compared with 21.6% a year ago, so, at least, it was in the co's target net debt ratio, which is in the range of 20-30%.
2017 guidance:
- The recently-announced portfolio additions will be accretive to cash flow over the longer term but will require additional cash outflow in the early years. Together with the mostly second half start-up of the new Upstream projects expected to come onstream in 2017, these significant and strategic additions mean that BP now anticipates balancing its organic sources and uses of cash by the end of 2017 in a Brent oil price environment of around $60 a barrel
- Including estimated additional organic capital spending associated with the portfolio additions, organic capital expenditure is now expected to be $16-17 billion in 2017
- Divestment proceeds for 2017 are expected to be $4.5-5.5 billion, reverting to $2-3 billion a year thereafter
Just under three months ago (on Feb 7), the co said the physical market has begun to tighten with inventories falling a little faster than seasonal norms. However, OECD inventories at the end of 2016 were still close to 3 billion barrels, significantly higher than their recent historic average. "We expect much of the historical inventory overhang to be eroded by the end of 2017 if OPEC and non-OPEC producers deliver on their promised production cuts. Any shortfall could delay this process and does still pose some downside risk to prices in the near term."
"So while we remain optimistic about the market continuing to rebalance in 2017, we recognise that this could take some time. In short, the road to a more balanced position still has uncertainties. So, we can't wait to see what BP has for us as a general market update.
Peers include: PTR, EC, TOT, SNP, STO, E, OXY, SSL, MITSY, ECA, YPF, PZE, RDS.A, CVX, XOM, COP
Interior Sec Zinke: plans to sign order to designate Energy Council; aims for US to be energy dominant, not just energy independent
- Signs secretary order to make 5-year plan for development of Outer Continental Shelf
Metro seeks higher valuation by splitting into two
Analysts warn demerger will not end challenges at retail and electronics arms
Breaking up can create value. This, at least, is the contention of Olaf Koch, chief executive of Metro, who has majority backing from his shareholders to split the company in two in the middle of 2017.
Mr Koch plans to spin off the German group’s food arm into a new company, which will keep the Metro brand, leaving a business centred on its Media-Saturn consumer electronics operations, to be renamed Ceconomy.
“The company argued for decades that synergy was the reason to be together [but] you notice that the overlap of the two [businesses] is nil,” he says in an interview with the Financial Times. “Consumer electronics and the wholesale food business with some non-food have literally only one common denominator, which is customer-centricity.”
Metro currently has a market capitalisation of €9.9bn and Mr Koch argues that its shares labour under a “conglomerate discount”.
He says Metro’s big wholesale food business, which sells products to grocers, pubs and restaurants, is currently undervalued because the stock market applies a trading multiple more appropriate to a retailer.
More importantly, he believes that the group demerger — in which Metro’s wholesale business is due to sit alongside its smaller Real chain of food hypermarkets — will allow him and other managers to give strategic priorities the attention they need.
“There is no point in artificially having a joint agenda,” says Mr Koch, referring to company meetings. “Half of the meeting you talk about consumer electronics, the second half of the meeting you talk about wholesale . . . Why are we forcing investors to be . . . in something which is tutti-frutti?”
The plan to break up Metro is the culmination of five years of effort by Mr Koch, who took over as chief executive in 2012, to improve profit margins and balance sheet strength at the German group.
“[Before 2012] the company had really been defined by size, and being big . . . was the ambition,” he says.
Mr Koch recognised that Metro should be split up early in his tenure but believed that he needed first to “get momentum” back into trading and “heal” the balance sheet. This involved selling off assets, such as the Galeria Kaufhof department store chain, and exiting markets.
Although Metro is still struggling on the revenue side — like-for-like sales in the last three months of 2016 barely rose — net debt of €7.4bn in March 2012 has fallen to €2.6bn at the end of 2016. By last summer Mr Koch felt he had the conditions in place to push for the demerger.
He received the overwhelming backing of investors — 99.95 per cent of shareholder capital represented at Metro’s annual meeting in February voted in favour of the split — but some, including Convergenta, the financial vehicle of Media-Saturn founder Erich Kellerhals, filed lawsuits against the plan. Convergenta has a near 22 per cent stake in Media-Saturn.
Analysts say the lack of overlap between Metro’s food and consumer electronics businesses has not helped it with most investors.
“If you . . . want exposure to cash and carry, the chance that you will also want exposure to electronics is quite low,” says one analyst.
Christian Bruns, analyst at Equinet, says: “The demerger will reduce the conglomerate discount, but you could still argue that each of the divisions should still trade at a discount to peers.”
He adds: “Metro still has the Real chain, which is not doing so well, and at Ceconomy there is still the question of the minority shareholder.”
The pressure on Metro’s Real hypermarket chain — it competes with aggressive discounters such as Aldi and Lidl, which have a 44 per cent market share in Germany — highlights how much work has to be done even if Mr Koch delivers the demerger.
He will lead the food business after the split and has to prove the Real chain, currently the group’s smallest unit, can find a sustainable business model. Last year Real recorded an operating profit of just €100m on revenue of €7.5bn.
Mr Koch says Metro is aiming to strike a deal with trade unions to reduce its labour costs at Real by early 2018. If the talks fail, he adds that he has an alternative plan in mind, although he declines to say what this entails.
In the longer term, perhaps the hardest challenge to quantify is how new entrants could shake up food retailing.
The grocery business has been comparatively slow to digitalise, and Alain Caparros, Mr Koch’s counterpart at Rewe, a big German supermarket chain, warned last year that the prospect of online giants such as Amazon moving into the food market was a threat that had to be taken seriously.
Mr Koch strikes a similar note. “Everybody knows our sector is exposed to dramatic change,” he says. “All the rules are changing.”
Cancer fund failure highlights the dilemma of drug pricing (Anjana Ahuja)
The challenge is to keep treatments affordable but still encourage innovation
The Cancer Drugs Fund was a trophy for politicians, a bottomless trough for public money and, worst of all, a tragedy for patients. The fund was set up in 2010 by the UK government as a way of expediting access to high-cost medicines for patients who did not have time on their side. It was supposed to cost £50m a year but ended up swallowing £1.3bn over six years.
In the measured language of an analysis published last week, the fund “failed to deliver meaningful value to patients or society” before it closed in 2016. Two years earlier, the CDF, designed to placate patient advocacy groups, was described by this newspaper as a “costly mistake”. Anyone who had oversight of the fund, from the National Audit Office to the influential parliamentary public accounts committee, condemned it as unsustainable. What happened is better characterised as a scandal.
The selling point of the CDF, which has since been radically reformed, was that it offered access to drugs that had either failed or not yet completed cost-benefit analysis by the National Institute for Health and Care Excellence. According to the paper published in the Annals of Oncology, only 18 of 47 available treatments offered any survival benefit. Some patients may have suffered toxic side-effects. The ringfenced fund, which elevated the financing of drugs above other factors that influence survival such as diagnostics and surgery, turned out to be a straitjacket, locking clinicians into paying inflated prices for therapies of dubious benefit.
The postmortem is essential reading for high-income countries grappling with the growing dilemma of drug pricing. Namely, how do governments settle on prices that are low enough to avoid bankrupting the economy but sufficiently high to encourage innovation?
The lead authors, at the London School of Hygiene and Tropical Medicine and Columbia University in New York, conclude that untouchable pots of money are unwise because they remove the imperative for drug companies to lower prices. Decisions should instead be made by bodies such as Nice, which operate without political interference, “to ensure decisions maximise value for cancer patients and society as a whole”.
Nice has threatened to stop recommending certain drugs unless companies slash prices, a tactic it deployed successfully with AstraZeneca’s ovarian cancer drug Olaparib. Its bargaining power derives from its ability to make decisions on behalf of the National Health Service. The reformed CDF came under Nice’s wings last year.
The challenge is this: the NHS, which offers free taxpayer-funded healthcare, must control costs at a time when the pharmaceutical sector looks vibrant. The UK, home to GlaxoSmithKline and AstraZeneca as well as a host of biotech start-ups, is in the curious position of having a pipeline of new cancer medicines feeding into a healthcare system that can barely afford them. This demands creative thinking, perhaps reimbursement contingent on outcome, or revamped post-licensing assessment regimes that mean drugs spend less time snarled up in regulatory limbo.
Otherwise, says Kapil Dhingra, an associate editor of the Annals of Oncology and former Roche executive, the UK risks becoming a nation of guinea pigs, with patients receiving treatments only in a clinical trial but not after licensing because of the sky-high costs. “That’s the kind of thing that used to happen in developing countries like India,” he said at a briefing in London last week.
Britain’s possible departure from the European Medicines Agency, which grants EU-wide marketing authorisation for new drugs, might also hamper timely access to novel therapies. Dr Dhingra said some companies might even shun the UK market, as a tiny slice of the increasingly affluent Indian and Chinese markets could offer more lucrative returns. This would be another avoidable tragedy in the making.
The writer is a science commentator