During the first two quarters of 2020, oil companies were forced into conserving cash as oil demand slumped to record lows. The impact of the pandemic was widespread, affecting almost all sectors and subsequent industries. Coupled with the enactment of government lockdowns across the globe and little to no travel, the demand for oil fell drastically. However, it’s not all doom and gloom as BP outperformed initial predictions to post a profit in the third quarter.
The underlying replacement cost profit (used as a proxy to calculate net profit) stood at $100 million. At the same time last year, BP recorded a third-quarter profit of $2.3 billion. This contrast clearly underlines the economic hardship faced by those in the oil industry. However, taking into consideration the loss experienced by BP in the second quarter ($6.7 billion), this is something to smile about.
The increase in prices of oil and gas, coupled with slightly higher demand, has proven enough to get BP out of the red. But, general market sentiment remains neither here nor there, as the global health climate is far from adequate.
Outlook remains turbulent
It remains to be seen if increased demand for oil will persist as a resurgence of covid-related cases are forcing governments to impose stricter domestic controls. This is particularly worrying for oil companies as winter approaches. The global economy continues to endure a turbulent time, and any let-up seems a distant way off.
What should also be noted is the fact that, although BP has managed to stick its neck out of the woods, the improvement is far from satisfactory. Profits are not nearly enough to sustain a viable business model on this scale, and BP will require profit augmentation on a much bigger scale. This sentiment is shared across the board and leaves many companies with bated breath.
What does the future hold?
BP has been looking toward the future for some time now in an effort to restructure current operations. As renewable energy continues to rise in prominence, BP has committed to adopting sustainable practices by way of large investment in wind power. The move toward renewable energy will be welcomed by many. In addition to these developments, BP wants to sell off a share of their current assets. In the next 5 years, BP hopes to sell $25 billion worth of assets in an attempt to reduce their current debt burden. It remains to be seen whether this will be enough to counteract the current deficit that BP has to wrestle with.
At the end of the day, BP and their competitors will not be able to rest easy for the foreseeable future. As the global climate continues to wreak havoc on markets, there’s no telling what might happen if a second surge occurs. In the coming days, remaining oil companies are set to report earnings. Follow these reports to find out if BP has managed to navigate the economic turmoil better than others.
