High oil price dividends hedge against the pain of transformation! British Petroleum (BP.US) predicts Q2 results: oil transaction revenue is expected to continue to grow, and the low-carbon business will be reduced by another 1 billion US dollars

The Zhitong Finance App learned that British Petroleum (BP.US) said in a trading update released on Tuesday that oil trading revenue for the second quarter is expected to “slightly increase” from the unusually strong first quarter, but at the same time, it will write down the energy transition business of about 1 billion US dollars. This move indicates that the British energy giant is continuing to make difficult strategic adjustments in the process of refocusing on its core oil and gas business.

Affected by the actual closure of the Strait of Hormuz and the interruption of global crude oil supply due to the Iran conflict, international oil prices rose sharply in the second quarter. British Petroleum said that the average price of global benchmark Brent crude oil was about 97 US dollars per barrel from April to June, far higher than 78 US dollars in the first quarter and about 67 US dollars in the same period last year. The refining profit margin also soared from $16.9 per barrel in the first quarter to $29.6. The company estimates that for every change in refining profit margin of 1 US dollar/barrel, the annual operating profit before tax will change by about 550 million US dollars.

Higher oil prices, combined with price lag, have significantly boosted the upstream earnings of British Petroleum. The company expects second-quarter revenue from the oil production and operation business to increase by 1.8 billion to 2.1 billion US dollars compared to the first quarter, with production contributions from the Gulf of Mexico and the United Arab Emirates outstanding. The realized price of the natural gas and low-carbon energy sector is expected to bring in incremental revenue of 500 million to 700 million US dollars. However, the natural gas trading performance is expected to be roughly flat from month to month.

In terms of production, BP expects upstream production to drop to 2.17 million to 2.22 million barrels of oil equivalent per day in the second quarter, down from 2.34 million barrels in the first quarter. The company explained that this is mainly due to a combination of seasonal maintenance and disruptions in the Middle East, and that upstream production is expected to decline throughout the year due to disruptions around the Persian Gulf. Currently, the company's daily production in Iraq, Oman, and the United Arab Emirates is about 400,000 barrels. Although no specific production discontinuation rate has been disclosed, it has previously been stated that some Abu Dhabi crude oil is being shipped through the Fujairah terminal in the Gulf of Oman to avoid the strait of Hormuz.

Among them, it is worth noting that BP is once again making a large-scale write-down on its low-carbon business. This depreciation of about 1 billion US dollars is mainly aimed at so-called “transformation businesses,” and does not include basic replacement cost profits. This is another asset cleanup following the company's $5 billion write-off of energy transition assets earlier this year. At the same time, the company will also confirm an exploration asset write-off of approximately US$500 million in the second quarter, mainly relating to the sale of interests in the Canadian Bay du Nord offshore project.

Since the new CEO Meg O'Neill took office on April 1, the British energy giant has clearly sped up the pace of returning to traditional oil and gas business. O'Neill has restructured his leadership and reporting structure, and has further consolidated his power after the departure of the former Chairman, Head of Trading, and Deputy CEO. Recently, former chairman Albert Manifford was removed from office due to “serious problems” in the company's conduct, supervision and governance, causing continued turmoil within the group, and O'Neill is also facing greater pressure to drive the company to achieve transformation.

At the financial level, BP's debt reduction is progressing. The company expects net debt to fall to $22 billion to $23 billion by the end of June, a significant decrease from $25.3 billion at the end of the first quarter. In the second quarter, BP paid $2.9 billion to redeem €2.5 billion permanent hybrid bonds and paid $1.1 billion in settlement liabilities related to the Gulf of Mexico oil spill.

Overall, total net debt, hybrid bonds, and Gulf of Mexico settlement liabilities decreased by about $6.3 billion to $7.3 billion compared to the previous quarter. The company aims to further reduce net debt pressure to $14 billion to $18 billion by the end of next year.

Barclays Bank analyst Lydia Rainforth and others pointed out in a research report released on Tuesday: “Although asset depreciation was not ideal, downstream business performance exceeded expectations, oil transactions achieved another good result, and continued decline in net debt all constituted positive hedging factors.”

After the release of this mixed update forecast, BP's stock price in London once rose 3%. The increase was basically in sync with crude oil futures, and slightly superior to European peers Shell (SHEL.US) and Total Energy (TTE.US). Looking at full-year performance, BP outperformed Shell, but still lags behind Total. BP will officially announce its full financial results for the second quarter on August 4.