Until 18 months ago, BP (LSE: BP) was largely the architect of its own misfortune. The Gulf of Mexico blow-out and controversial tie-upwith Kremlin-controlled Rosneft both stemmed fromits own actions. But there was nothing the oil giant could do about the plunging oil price, an event almost entirely beyondits control. BP is at the mercy of wider forces, which is never a good place to find yourself.
With oil collapsing to around $50 a barrel, BPs profits were bound to collapse as well. Hence the 40% drop in Q3 profits to 1.8bn. BP isnt completely helpless, there is plenty itcan do to mitigate the damage, such as offloadingassets, cutting jobs, slashing capex anddumping unprofitable oil projects. Thiskept investors happy andallowed it to holdthe dividend unchanged at 10c a share.
The money BP has raised fromthese activities was hardly insubstantial. Divestmentshave brought in $7.8bn so far this year, which should hit $10bn by the end of the year. This should bring ina further $3-5bn next year, with $2-3bn ayear thereafter. The money will offset all volatility, fund remainingDeepwater compensation payments, and allow BP to keep its generous dividends flowing a while longer.
BP has also cut forecast capex spend from around $25bn ayear to just$19bn this year. Controllable cash costs are also down around$3bn. With an annual dividend bill of around$9bn, BP needs to raise all the cash it can to avoid a damaging cut to its payouts.Its downstream business is doing well, with Q3 pre-tax profits of$2.3bn, up from $1.5bn during the same period last year.
What BPreally needs is ahigher oil price. Chief executive Bob Dudley is bracing himself for oil at$60 a barrel until 2017. At time of writing it trades at$46.75, well below the required number. Dudley claims to have reset BP for a sustained period of lower oil prices and the results are coming through well, but has he set his sights low enough? Goldman Sachs is predicting further downside risk for oil prices next spring.
Should the oil price fall further, BP and Dudley could be hammered forthis weeks optimism. Worse, todays juicy 6.47% yield could ultimately come under pressure, as thedividend becomes unsustainable.
Shock In The Dark
The oil price could flip in an instant. A change in Saudis sky-high production policy, or even the hint of a change, could seeit soar. If events get out of hand in Syria, again, the price could fly. A continuing drop in US rig count as shale industry margins wither could also hit supply. Demand is less likely to come to BPs rescue, as deflation tightens its grip on the global economy, but asupply shock could quickly force prices upwards.
Dudley appeasedthe market this weekand BPs share price is now up 14% over the last month. If oil does hit$60 and beyond, its share price will fly. Buy now and you are effectively betting that the oil price will recover to $60 or higher. It could prove a lucrative bet, but remember, the oil price is beyondyour control as well.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.