Big Oil Earnings Still Battered By Low Oil Prices

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November 2, 2015 12:23pm ETF BASIC NEWS

crudeoilBob Ciura:  It should come as a surprise to nobody that Big Oil is in big trouble. Over the past year, oil has fallen from its 2014 peaks of above $100 per barrel to its current level near $40 per barrel. As commodity producers, oil companies are highly reliant on the price of the underlying commodity.

This has caused profitability across the oil sector to collapse.


Two examples of this were the recent Big Oil earnings reports from integrated majors BP PLC (NYSE:BP) and ConocoPhillips (NYSE:COP). Both reported earnings this week, and both companies bore the brunt of low commodity prices last quarter.

Cost Cuts and Asset Sales

BP reported $1.8 billion of net profit on $55.9 billion of revenue for the third quarter. Revenue fell a whopping 41% year over year, not surprisingly due to the crash in oil prices over the past year. Still, BP’s earnings beat analyst expectations, which called for just $1.26 billion of profit.

ConocoPhillips was not as fortunate as BP. Last quarter, ConocoPhillips posted a $1.1 billion net loss, compared with a $2.7 billion net profit in the same quarter last year. On a per-share basis, ConocoPhillips’ adjusted net loss came to $0.38 per share. This was slightly worse than the $0.37 per share average loss expected by analysts.

The major factor helping BP right now, and simultaneously hurting ConocoPhillips, is that BP operates a large refining business. Refining is actually doing very well right now, since lower oil prices also lowers refining feedstock costs. This widens margins and increases profitability.

To that end, earnings in BP’s refining business grew 53% last quarter, year over year, to $2.3 billion. At the same time, ConocoPhillips does not have a refining business, as it spun off its downstream operations.

In response, both companies have meaningfully reduced expenses and are aggressively selling off assets. BP expects to spend $19 billion this year on capital expenditures, down from expectations of $20 billion last quarter. Going forward, the company plans to reduce spending even further, to $17 billion-$19 billion per year through 2017.

In addition, BP expects to divest $10 billion of assets by the end of the year, and has already planned another $3 billion to $5 billion in asset sales next year, and at least $2 billion per year thereafter.

For its part, ConocoPhillips once again reduced its capital spending outlook for the remainder of the year. ConocoPhillips forecasts $10.2 billion in full-year capital expenditures, down from its prior outlook of $11 billion.

Dividends Remain Intact

One of the biggest questions surrounding the oil majors during this brutal period of falling oil prices is whether they could sustain their dividends. As their stock prices fall, their dividend yields increase, which is typically a sign that the market believes a dividend cut is in the future.

BP and ConocoPhillips currently yield 6.7% and 5.5%, respectively. With revenue and earnings seemingly in a free fall, their high dividend yields are an added burden. Fortunately for investors, both ConocoPhillips and BP declared their most recent dividend payments after reporting quarterly results.

The reason BP and ConocoPhillips are so unwilling to cut their dividends is because investors typically respond by selling the stock of a company that cuts its dividend. It is not uncommon to see a company lose as much, or more, in market value after cutting a dividend, than the company saves by reducing its payout.

Oil investors take dividends very seriously, and management teams know this. That is why BP and ConocoPhillips have taken every step available, including massive spending cuts and asset sales, to continue paying their dividends.

As a result, while growth investors may not view the oil patch very positively in light of falling revenue and earnings, income investors can continue to have confidence in these stocks, for now.

DISCLOSURE: Bob Ciura personally owns shares of BP PLC (NYSE:BP).

This article is brought to you courtesy of Bob Ciura from Wyatt Research.

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