BP shares surge on underlying earnings strength

BP shares surged higher at the open on Tuesday after a surprisingly confident fourth-quarter report with higher-than-expected profits.

Of course you have to clean out a lot of mess from these earnings to see that profit, like a $3.6bn post-tax impairment charge mostly related to revaluation of upstream assets in the North Sea and Angola—and ultimately of course, a consequence of the oil price collapse.

On a reported basis, the replacement cost line is in the red by $969m.

But on an underlying basis, replacement cost profit was $2.2bn compared with BP’s own poll of analysts showing most expected $1.57bn.

It’s the underlying result that’s being well-received by the market, with the shares having blasted out the gate almost 6% higher, before settling back to a still-impressive 3%-4% higher.

In its fourth-quarter, BP edged down crude oil production—which is likely to be viewed widely as sensible given an increasingly ambiguous crude oil price trend, especially over the last week or so.

Cost cuts a balancing act

However, despite cuts and postponement of small projects, BP expects to produce more oil this year than last. This is also sensible, considering the finely-balanced environment for production the sector seems to be entering.

In fact we noted Exxon, which reported yesterday, did not cut capex or opex, although it reduced the rate of these expenditures. Having a wider margin to fund these out of existing cash flows afforded the US giant that luxury, and also, arguably put it ahead of the curve in the event of a sustained rebound in oil prices.

BP also needs to be mindful of rivals like Exxon as the latter also made it quite clear it was on the lookout for strategic bolt-on acquisitions—these might in fact, or at least in the minds of investors, place it in a sweet spot when oil prices have based.

The other big news from BP this morning is that it plans a further $20bn in capex cuts for 2015, just a tad lower than the rate for last year.

There’s nothing further on headcount reduction after BP said in mid-December it would cut jobs and take a $1bn charge, against an unspecified reduction of its circa 83,000 employees.

The dividend for the quarter is kept at 10 cents a share, as widely expected, keeping BP on track to keep its status as the biggest dividend payer in the FTSE 100.