BP third-quarter profit nearly halves but soundly beats consensus

BP opens lower despite Q3 beat

BP has reported net profit for the third quarter of $1.62 billion, trouncing consensus expectations of $686 million, but still only delivering around half of last year's result for the period.

This as the oil major sliced spending by another $1 billion dollars as the hit from weaker oil prices continued to bite. The company warned industry refining margins will continue to be under pressure in the fourth quarter yet despite this, the oil major says it expects a slight improvement in the final quarter of the year.

Underlying replacement cost profit, the actual metric that BP use for net income, came in at $933 million for the quarter, compared with $1.8 billion a year ago. Shares slipped by around 1.2 percent as the European session began on Tuesday.

Brian Gilvary, BP's chief financial officer said in the company's press release: "We continue to make good progress in adapting to the challenging price and margin environment. We remain on track to rebalance organic cash flows next year at $50 to $55 a barrel, underpinned by continued strong operating reliability and momentum in resetting costs and capital spending."

"At the same time we are investing in the projects, businesses and options to deliver growth in the years ahead," the statement added.

A man pumps his own gas at a BP gas station.
Spencer Platt | Getty Images

Weakness was centered around BP's upstream operations which reported an underlying pre-tax loss compared to profits in both the second quarter of 2016 and this period a year ago. The company pointed to weaker oil and non-U.S. gas prices and lower gas marketing and trading as responsible for the decline.

The contribution from Russia's Rosneft, from which BP receives a 35 percent share of net income for its stake remained positive but came in less than a third of the third quarter 2015 figure.

Production for the quarter was in line with the consensus figure of 2.11 million barrels of oil equivalent per day while net debt at the British oil and gas major rose to $32.4 billion versus $25.6 billion a year ago.

Earnings per share of 8.56 cents came in far ahead of broker estimates of 3.31 cents and BP is set to maintain its dividend at 10 cents per share. Shares fell 1.3 percent as the European session opened on Tuesday.

Jason Gammel, equities analyst at Jefferies, thought BP's numbers looked fine but were overshadowed by a stronger performance at peer Royal Dutch Shell which also reported on Tuesday morning.

According to Gammel, "There is nothing in the underlying numbers which are concerning to me."

Turning to the company's spending plans, the Jefferies analyst said he saw a continuing but much more moderate decline in spending on the horizon.

"We are projecting that we will see a 5 percent decline in capital spending in 2017, relative to 2016, but this follows a 42 percent reduction in capital spending from 2014 through 2016 so it really has been a very marked decrease in spending," Gammel told CNBC Tuesday.

Focusing on the extreme sensitivity to the level of the oil price for the sustainability of BP's plans, Gammel noted:

"I would almost argue that these companies are underspending right now if they want to replace their production, because this is a declining asset base. The point is well taken that the dividend is not well covered without further capex (capital expenditure) cuts with oil prices in the low 40s but in mid-50 type price environment, there is some room for further capex expansion and still covering dividends."