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Oil giant BP saw a 96% fall in fourth-quarter profits as a direct result of the pandemic’s impact on global energy demand.
While the impact of almost a year of national lockdowns and travel bans was always going to hit energy demand, and as a result the oil major’s earnings, the slump is even worse than analysts had feared - with the profit forecast having been pencilled in closer to the $370 million mark.
Today’s announcement reveals that underlying profit on a replacement cost basis, which is the measure of income most closely tracked by oil analysts, came in at just $115 million in the three months to the end of December. During the same period last year BP generated $2.6 billion.
Reduced demand, a collapse in energy prices, a write-down in the value of oil and gas assets by billions of dollars and weaker refining margins have all spelled bad news for BP, which saw a full-year loss of $5.7 billion; its first slide into the red in a decade and a long way from the profit of $10 billion it managed to generate in 2019.
The price of crude oil has recovered from last April’s lows of less than below $20 a barrel, but with Brent crude once again above $55 a barrel, is still some way from the $70 or so it was at a year ago.
And all of this, of course, is not just a problem for BP. The pandemic, which has brought about the deepest collapse in demand for the oil giants’ products in history, is something that has hit every one of the oil majors hard.
In April Royal Dutch Shell cut its dividend for the first time since the second world war. And in May ExxonMobil reported its first loss since the mega-merger that formed the group in 1999.
And even before the pandemic, the energy sector was feeling the chill. A year ago the big question was just how do these companies that generate most of their profits by meeting the world’s demand for oil and gas, navigate the future when the tide is rapidly turning against fossil fuels? The more burning question today might be when that demand might return, but when it does, the focus will immediately switch back to the question of sustainability. Investors have increasingly been looking elsewhere for lower risk and higher returns and an altogether greener way of growing their money.
That is something the oil companies are well aware of. Billions have been spent, by the likes of BP and Shell, in an attempt to rebrand themselves as part of the solution to the climate crisis. From claiming that natural gas, a fossil fuel that emits heat-trapping carbon dioxide, is helping to slow climate disruption by providing an alternative to coal, to investing in public relations programs like sponsored beach clean-ups and tree planting.
BP chief executive Bernard Looney, who started in the role last February, quickly pledged to turn BP into a net-zero emissions company by 2050. He has been busy selling assets and reshaping the business for a lower carbon future. Mr Looney wants to sell $25 billion in assets by 2025 to cut debt and pay for BP’s green energy turnaround.
Capital spending has been cut by billions of dollars, costs have been dramatically reduced, and overall capital expenditure is expected to come to $13 billion in 2021.
Meanwhile, BP has said its net debt, which stood at $39 billion in the fourth quarter, is set to increase in the first quarter of 2021. However, it aims to reach its $35 billion target as early as the end of this year.
All of this though does not come without its own cost. BP said it expected its headcount to reduce by around 10,000, which aside from the human toll in an already-strained workforce, will see it handing out redundancy payments of around $1.4 billion over the next year or so.
Investors have already felt the impact too. BP’s third-quarter dividend almost halved, in its first dividend cut since the Deepwater Horizon disaster in 2010, to 5.25 cents a share, but that has been maintained, including in the latest quarter. Mr Looney and the other oil giant bosses have a long and difficult uphill struggle on their hands, with the pandemic and the eventual global recovery still likely to be some way off yet. However, even once all that is achieved, it is likely to be the task of winning over hearts and minds that is set to be the toughest one yet.
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