BP’s (LSE: BP) first quarter results may appear to be hugely disappointing at first glance. That’s because the oil and gas producer has recorded a fall in underlying replacement cost profit of 80% versus the same quarter of the previous year. Clearly, this is disappointing and is due to the steep decline in the price of oil during the period, with Brent oil averaging $34 per barrel in the quarter versus $54 per barrel in the first quarter of 2015.
However, shares in BP are up by over 3% today despite such a major fall in the company’s profitability. That’s at least partly because BP seems to be adapting successfully to the lower oil price environment which it now faces. For example, it has severely reduced its cost base and this has helped the company to offset the impact of significantly weaker oil and gas prices. And with BP driving towards its near-term goal of rebalancing its cash flows, as well as the company having strong operational performance, it seems to be on the right track to deliver improved financial performance in future.
Good news ahead
Looking ahead, BP believes that the continuation of robust demand and weak supply growth will move global oil markets closer to balance by the end of the year. This is very positive news for the company’s investors and could signal that the days of sub-$50 oil are somewhat limited. With BP announcing an unchanged dividend for the quarter of 10 cents per share and it being committed to sustaining its dividend as a first priority, the outlook for income-seeking investors appears to be rather bright.
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In fact, BP now yields a whopping 7.3% and while this indicates that the market is anticipating a cut to shareholder payouts over the medium term, BP believes that it will be able to rebalance organic sources and uses of cash at between $50 and $55 per barrel. And as the company steadily takes out more costs, the point at which it expects to be able to balance cash flow is moving lower. This bodes well not only for dividend payments but also for the long-term financial health of the business.
Clearly, BP is still facing a highly uncertain future and further falls to the oil price can’t be ruled out. However, it seems to have a sound strategy through which to emerge as a stronger entity, with its cost base lower and gearing levels still being within the target 20% to 30% range. With BP trading on a price-to-earnings (P/E) ratio of 14.3, it seems to offer a relatively wide margin of safety. As such, its risk/reward ratio appears to be highly appealing and therefore BP could prove to be a superb buy for the long term.
