BP turns leaner and meaner

Oil giant BP announced underlying profits of $3.7bn in the third quarter, down from $5bn a year ago, but ahead of expectations. The drop was largely due to asset sales.

It has ditched $38bn of its holdings to compensate for the cost of its 2010 Gulf of Mexico oil spill. BP announced another $10bn of disposals and said the money would go to shareholders.

It also raised its dividend by 5.6%. The stock jumped by 5%, propelling the FTSE 100 to a five-month high.

What the commentators said

BP “seems to have received and understood investors’ messages on fruitless investment spending in the sector”, said Helen Thomas in The Wall Street Journal.

Oil majors have more than doubled capital investment to $130bn in the past seven years, according to McKinsey, but the splurge hasn’t been productive.

Return on capital is still below the level of five years ago. So investors are glad BP is keeping spending levels flat and giving them money.

Meanwhile, said John Ficenec in The Daily Telegraph, even though revenue is to decrease over the next few years as disposals are made, profitability and cash flow look set to improve. So the oil business is becoming more efficient.

That is the reason why the management is confident enough to increase the dividend. “Shrink to fit worked for Levi’s,” said Lex in the FT. “It seems to be working for BP too.” The company has, indeed, become “leaner and meaner”.

Nonetheless, there is still a “huge unknown around the court ruling in the US”, said Ficenec. At issue now is how much oil was spilt.

If BP is found to have been grossly negligent, it could face fines of more than $18bn. But if its estimate of the oil spill is accepted and it is deemed merely negligent, the fine will be just $2.7bn. Shareholders can’t relax just yet.

Merryn

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