BP needs to ramp up the positive spin

After a tough year, BP needs to put a good spin on its outlook to avoid a crashing disappointment for investors.

BP petrol station sign
Source: Bloomberg

Lower oil prices will remain the dominant theme in BP’s full-year earnings. This should surprise no one, and the key to the performance of the shares on results day will be the outlook for the coming year. Investors would like to think the worst is behind them, and while oil prices remain a long way from the highs of 2011/2012, the hope is the price has finally stabilised.

The shares have done well since the lows of 310p in February, helped by a substantial rally in crude oil, a revival of bullish sentiment and a bonfire of short positions that has carried many previously unloved shares to new highs for the year.

Even now, BP trades on a forward earnings multiple of 28 times, based on earnings of 17 cents per share in 2017. This would seem to be rather overambitious, to say the least. The shares currently trade on a yield of 7%, well above the market average, which implies that we will see little in the way of dividend growth, and even a cut to a payout in the future should the company look to reduce costs.

Analysts expect the firm to post a loss of 10 cents per share for its first quarter. This would be a marked drop from earnings of 85 cents per share for the same period a year ago. Meanwhile, revenues are expected to drop by 26% from the first three months of 2015. Upstream earnings, i.e. those that involve oil and gas exploration and production, are expected to be under extreme pressure given the fall in oil prices. Downstream earnings, which covers refining, is likely to be slightly better, but even here the overall universe of excess production and low prices will make its presence felt. 

BP earnings surprise chart

Whether investors believe oil stocks mark a good long-term investment really depends on their view regarding the prospects for an oil output freeze. Given the recent reaction to the news of no deal among OPEC members in Doha, it seems the market thinks one is unlikely. Instead, optimism will focus on continued drops in US production and on the longevity of bigger firms like BP. The firm, like its peers Shell and Exxon, has the deep pockets to weather the storm, although it will likely continue with its programme of capex reductions and asset sales. While a necessary evil, this will mean BP will not bounce back quickly should oil prices recover in the future.

BP shares have recently done the previously unthinkable, and breached the 200-day simple moving average (362p). While still well down on the levels seen at the beginning of 2015, the steady progression of lower lows seems to have halted, with the 320p level last September acting as vital support. The price now needs to break the February high around 380p and then move on to the crucial 400p level. 

BP share price chart

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