Shares inBP (LSE: BP) have slumped this morning and are currently trading down around 7% after the companyrevealed it had swung to a $2.2bn loss for the last quarter of 2015 and announced thousands more job cuts.
BP reported anunderlying replacement cost profit for the fourth quarter of just$196m, down 91% year-on-year and well short of City expectations.Underlying replacement cost profit isanalysts preferred measure of profitability for companies such as BP as the measurestrips out one-off charges. On an unadjusted basis, BPs loss of$2.2bn compared with a loss of $969m the previous year.
Once again, profits from BPs downstream (refining and marketing) segmenthelped offset the majority of the losses incurred by the companys upstream (production) arm.The downstream segment reported an underlying pre-tax replacement cost profit of $1.2bn for the quarter while the upstream division reported anunderlying replacement cost loss of $728m.
For the full year, BPs downstream operations racked up pre-tax earnings of $7.5bn, a record for the segment, helping to offset losses in the upstream division and showing the benefits of BPs vertical integration.
Thanks to downstreams strong performance, BPs underlying cash flow for the full-year came in at $20.3bn, compared with$32.8bn for 2014, a relatively modest fall of 38%.
Cost cuts and one-off charges
As BP is being forced to adapt to the lower oil price, the company is taking some hefty restructuring and impairment charges, which made up the majority of the companys loss for the fourth quarter. Indeed, during the three-month period, the companys upstream segment reportednon-operating net impairment losses of $1.6bn. Andcumulative restructuring charges from the beginning of the fourth quarter of 2014 totalled $1.5bn by the end of 2015.
Managementis forecastingafurther $1bn of restructuring charges for2016 as the group cuts costs further. The company is now expecting to cut an additional 4,000 upstream jobs and 3,000 downstream jobs by the end of 2017. Total restructuring charges are expected to be $2.5bn by the end of 2017.
And while these restructuring charges may seem hefty at first glance, BP is already saving billions from a lower cost base. Controllable cash costs in 2015 were $3.4bn lower than in 2014 and are on track to be close to $7bn lower in 2017.
Not that bad
At first glance, BPs fourth-quarter and full-year 2015 results look dismal. However like all oil producers, BP is currently going through a transition as it adapts to lower oil prices. Restructuring and impairment charges are now commonplace for the whole oil sector and BP is no exception.
Still, BP has today announced that the companys dividend is here to stay for the foreseeable future and with a gearing level of only 21.6%, the company can afford to keep this promise. Whats more, BPs cost savings are shaving billions from the companys annual cost base, which should help maintain the groups cash flow and accelerate a return to profit if oil prices return to their 2011 highs.
So overall, BP had a rough 2015 but the companys long-term outlook remains bright, and the groups 7.5% dividend yield looks safe for the time being.
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