A bigger picture

February is traditionally a busy month in the corporate calendar, as companies report their fourth-quarter and full-year earnings, and often provide guidance for the new year and beyond. And it is not unusual for companies, their investors and business journalists to disagree on what are the main metrics of the firms’ performance.

“I am a little surprised at the reaction at the market to our results, because the one metric we measure and run the company on more than anything is cash flow. We generated $5.8bn of cash flow in the fourth quarter, and that seems to have been missed,” BP chief executive Bob Dudley said after his company’s share price fell on 2 February following the release of its results.

BP reported a $2.2bn loss in the fourth quarter after taking $2.6bn in post-tax charges, mainly because of impairments of upstream assets triggered by lower oil and gas prices. Its full-year loss amounted to $5.2bn amid post-tax charges of $11.3bn, largely related to the 2010 US Gulf of Mexico oil spill.

Norway’s state-controlled Statoil made its first annual loss “in modern times” in 2015, as chief executive Eldar Saetre put it, also pressured by impairment charges.

But companies argue that it is more important to look at adjusted profits that exclude one-offs. Those numbers were not negative for either BP or Statoil. Saetre says his focus is on the underlying business and the underlying performance, rather than one-offs.

One-offs “are just big negatives you can do nothing about, because the accounts require you to do that”, BP chief financial officer Brian Gilvary says. He points out that even when one-offs are included, BP has made annual losses only twice in the last 15 years — in 2010 and 2015. On both occasions the company was hit by huge provisions related to the Gulf of Mexico oil spill.

Losses made as a result of one-off charges are effectively paper losses, because they do not usually lead to immediate outflows of cash. For example, BP’s spill-related settlement last year means the company has to pay close to $20bn — a significant amount — but over a long period of up to 18 years.

Nevertheless, such losses affect a company’s value, even if they do little to restrict the firm in delivering short-term value to shareholders, and that is why they attract a lot of attention in the market. And business journalists are drawn to the one-off losses, because they are often where the news stories can be found.

Cash flow generated from operations is arguably the most important metric when companies decide whether they are able to at least maintain dividend payments in the lower oil price environment. And large oil and gas companies pull all available levers to avoid dividend cuts even when oil prices are at multi-year lows.

“Cash is the most important. It is the blood of the company at the end of the day,” Total chief executive Patrick Pouyanne says.

In the current oil price environment, a lot of attention has been paid to how successful companies are in reducing investment and deepening savings to preserve cash. The world’s largest oil and gas company, ExxonMobil, which kept mum on capital expenditure (capex) reductions through the whole of 2015, said this month that its 2016 capex budget will fall sharply, to $23.2bn from $31.1bn last year. This compares with BP’s 2016 guidance at the lower end of a $17bn-19bn range compared with $18.7bn in 2015.

When I asked Dudley whether he felt pressured to cut BP’s capex further, he answered: “I am really glad you brought this up, because I do not think people realise this. In 2013-14, we were at a $24bn-26bn capex number, and we came right down fast.” And — returning to the theme of companies, investors and the press talking at cross-purposes — he added: “I do not think people gave us a little bit of credit for the sharp cut we took early. I think there has been a misunderstanding.”

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