BP’s profit cut in half but $13.8 billion still cinched in 2023

UK-headquartered oil and gas giant BP has experienced a significant drop in profits alongside its peers due to lower oil and gas prices and refining margins. Despite a 50% fall in profit on a year-over-year basis, compared to the profit bonanza in 2022, the UK firm still reported a solid overall operational and financial performance during 2023 while reimagining itself in a bid to transition from an International Oil Company (IOC) to an Integrated Energy Company (IEC). On this quest, the oil major will keep pursuing its existing strategy which revolves around resilient hydrocarbons, convenience and mobility; and low-carbon energy.

While the European and U.S. oil majors’ overall profits are affected by the downturn in energy prices, all of the companies so far have reported multi-billion-dollar profits, as confirmed by Shell, Chevron, and ExxonMobil, which posted profits of $28 billion in 2023 compared to $39.9 billion in 2022; $21.37 billion last year versus $35.5 billion in 2022; and $36 billion in 2023 in comparison with $55.7 billion from the year before, respectively.

BP disclosed its results for the fourth quarter of 2023 on Tuesday, February 6, recording an underlying replacement cost profit of $3 billion in 4Q 2023, compared with $3.3 billion for the previous quarter and $4.8 billion in the fourth quarter of 2022. The firm’s underlying replacement cost profit for the full year 2023 was $13.84 billion compared to $27.7 billion in 2022.

When compared to 3Q of 2023, this result reflects a strong gas marketing and trading result, higher oil realizations including the favorable impact of price-lags on Gulf of Mexico and UAE realizations, higher gas realizations, significantly lower industry refining margins albeit with a smaller decrease in realized refining margins, a weak oil trading result, higher exploration write-offs, and level of refining turnaround activity.

According to BP, the reported profit attributable to its shareholders for 4Q 2023 was $371 million, compared with $4.86 billion for the third quarter of 2023 and a profit of $10.8 billion in the fourth quarter of 2022. The profit attributable to the company’s shareholders was $15.24 billion for the full year 2023, compared to a loss of $2.5 billion in 2022.

The result for 4Q 2023 is adjusted for inventory holding losses of $1.2 billion – net of tax – and a net adverse impact of adjusting items of $1.5 billion – net of tax – to derive the underlying replacement cost profit. Adjusting items pre-tax include impairments of $4.6 billion, largely as a result of changes in the group’s price and discount rate assumptions, activity phasing, economic forecasts, primarily due to the Gelsenkirchen refinery and portfolio composition, and favorable fair value accounting effects of $2.6 billion.

The oil major highlighted that its operating cash flow in the fourth quarter of 2023 was $9.4 billion including a working capital release – after adjusting for inventory holding losses, fair value accounting effects, and other adjusting items – of $2.1 billion. This is compared to the firm’s operating cash flow of $8.75 billion in 3Q 2023 and $13.57 billion in 4Q 2022. The company’s capital expenditure in the fourth quarter of 2023 and the full year was a loss of $4.7 billion and $16.25 billion, respectively.

In contrast, the capital expenditure in 3Q 2023 was a loss of $3.6 billion, and a loss of $7.37 billion in the fourth quarter of 2022. The company’s net debt reached $20.9 billion at the end of the fourth quarter of 2023, compared to $22.32 billion in 3Q 2023 and $21.4 billion in 4Q 2022. For 2024 and 2025, BP expects capital expenditure of around $16 billion per annum, in line with its medium-term target of $14-18 billion.

BP completed a share buyback program of $1.5 billion on February 2, 2024. The company intends to execute a $1.75 billion share buyback before reporting its first-quarter results and is committed to announcing $3.5 billion for the first half of 2024. At current market conditions and subject to maintaining a strong investment grade credit rating, the UK giant plans share buybacks of at least $14 billion through 2025 as part of its commitment to returning at least 80% of surplus cash flow to shareholders.

Kate Thomson, BP’s Chief Financial Officer, commented: “BP delivered strong underlying financial performance in 2023 – we raised dividend per ordinary share by 10% and bought back $7.9 billion of shares. We remain focused on strengthening the balance sheet, with net debt falling to $20.9 billion, the lowest level over the past decade. As we look forward, we are staying disciplined, tightening our capital expenditure frame and simplifying and enhancing our share buyback guidance through 2025.”

During 4Q 2023, BP continued making inroads in its transformation to an IEC. When it comes to resilient hydrocarbons, the UK firm announced the start-up of Seagull, expected to add around 15,000 barrels of oil equivalent per day of net production by 2025. The company also sanctioned the Argos Southwest Expansion project in the Gulf of Mexico and the expansion of the Great White development project. Additionally, the oil major won the Tupinambá block in the Santos pre-salt basin in Brazil.

According to BP, its first goal of deploying a methane measurement approach to all its operated upstream oil and gas assets by the end of 2023 has been achieved. Regarding low-carbon energy, the energy giant has agreed to acquire the 50.03% interest it does not already own in Lightsource BP, a developer and operator of utility-scale solar and battery storage assets. This transaction is expected to complete in the second half of 2024, subject to regulatory approvals.

Murray Auchincloss, BP’s Chief Executive Officer, highlighted: “Looking back, 2023 was a year of strong operational performance with real momentum in delivery right across the business. And as we look ahead, our destination remains unchanged – from IOC to IEC – focused on growing the value of BP. We are confident in our strategy, on delivering as a simpler, more focused and higher-value company, and committed to growing long-term value for our shareholders.”

Looking ahead, the UK oil major expects the first quarter of 2024 reported upstream production to be higher compared to the fourth quarter of 2023. While anticipating seasonally lower volumes across most businesses and the absence of one-off positive effects from the fourth quarter, the company expects fuel margins to remain sensitive to movements in the cost of supply.

As the firm forecasts a significantly lower level of refinery turnaround activity compared to the fourth quarter, it predicts lower industry refining margins, with a larger reduction in realized margins due to narrower North American heavy crude oil differentials.

For the full year 2024, BP expects both reported and underlying upstream production to be slightly higher compared with 2023. In light of this, the firm anticipates underlying production from oil production and operations to be higher and production from gas and low-carbon energy to be lower.

Expectations for 2024 also entail continued growth from convenience, including a full-year contribution from TravelCenters of America; a stronger contribution from Castrol underpinned by volume growth in focus markets; and continued margin growth from BP pulse driven by higher energy sold. In addition, the firm expects fuel margins to remain sensitive to the cost of supply.

Furthermore, the UK player anticipates a lower level of industry refining margins, with realized margins impacted by narrower North American heavy crude oil differentials while refinery turnaround activity is expected to have a similar impact on both throughput and financial performance compared to 2023, with phasing of activity in 2024 heavily weighted towards the second half.

Aside from this, BP expects the depreciation, depletion, and amortization to be slightly higher than 2023; the underlying ETR for 2024 to be around 40%; capital expenditure of around $16 billion, weighted to the first half; and divestment and other proceeds of $2-3 billion in 2024, weighted towards the second half.

Having realized $17.8 billion of divestment and other proceeds since the second quarter of 2020, the oil major continues to expect to reach $25 billion of divestment and other proceeds between the second half of 2020 and 2025. BP anticipates Gulf of Mexico oil spill payments for the year to be around $1.2 billion pre-tax, including $1.1 billion pre-tax to be paid during the second quarter.

While no one can deny the annual slump in BP’s 2023 profit, climate and environmentalist activists and campaigners have put the UK’s player’s results under scrutiny, with Common Wealth claiming that BP invested seven times as much in fossil fuels or $9.3 billion, and distributed ten times – $13.1 billion – as much to shareholders as it invested in low-carbon, which the think tank calculated to be $1.3 billion.

As it perceives fossil fuels to be the biggest contributor to the climate crisis, Greenpeace accused BP of being “one of the world’s biggest polluters,” following the firm’s announcement of $13.9 billion profit for 2023, which the environmental group described as Earth’s hottest year on record.

Currently, BP is busy with multiple hydrocarbon and green energy projects. Recently, the UK giant welcomed the arrival of a floating liquefied natural gas (FLNG) unit destined for its Greater Tortue Ahmeyim (GTA) natural gas project off the coasts of Mauritania and Senegal.

After the security situation in the Red Sea became precarious, BP, Shell, QatarEnergy, and many other companies, including shipping giants, decided to avoid the Red Sea trade route in response to rising Houthi vessel attacks.

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