BP debt keeps rising as oil rebound boosts cash flow

London - BP’s net debt rose again in the first quarter, reaching the highest level in at least a decade as the rebound in oil prices failed to cover spending and dividends.

The continuing rise in borrowing shows how the London-based company is struggling to cover its commitments, which still include billions of dollars in payments related to the 2010 Gulf of Mexico oil spill, despite an increase in crude prices of more than 50% from a year earlier.

While CEO Bob Dudley pledged to “drive a material improvement in operating cash flow from the second half,” the company’s gearing - the ratio of net debt to capital - inched closer to the top end of its 20% to 30% target range.

BP reported first quarter profit adjusted for one-time items and inventory changes of $1.51bn, an increase from $532m a year earlier and exceeding the $1.21bn average of analysts’ estimates.

While the earnings beat should ease investor concern about BP’s ability to maintain its dividend, the company has yet to prove it has a sustainable business with oil trading near $50 a barrel. Its stock has been the worst performer among Europe’s oil majors this year.

BP’s gearing rose to 28% in the first quarter, compared with 26.8% at the end of 2016. Net debt was $38.6bn, the highest since at least 2007, according to data compiled by Bloomberg. Operating cash flow of $4.4bn in the first quarter was reduced to $2.1bn by payments related to the Gulf of Mexico oil spill.

Spill liabilities

BP’s debt levels may approaching a peak. The company expects that cash flow will rise in the second half of the year, when several oil and gas projects come on stream, and spill payments will probably decrease. BP paid $2.3bn to cover Gulf of Mexico liabilities in the first three months of 2017, about half the expected $4.5bn to $5.5bn for the year.

Exxon Mobil, the world’s biggest oil company by market value, Chevron and Total all reported quarterly earnings that surpassed analyst estimates last week. Royal Dutch Shell is scheduled to report May 4.

BP’s shares have fallen 13% in London this year, as have Shell’s B shares. Total has declined 3.2%. BP rose 44% last year, the first annual gain in three.

Brent crude, the benchmark used to price more than half the world’s oil, averaged $54.61 a barrel in the first quarter, 55% more than a year earlier and the highest in more than two years.

Prices are down 9.6% this year as global supplies remain high despite the Organisation of Petroleum Exporting Countries and some other nations including Russia cutting production.

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