BP’s liquidity position
BP’s (BP) cash flow from operations rose 13% YoY (year-over-year) to $2.1 billion in 1Q17. The company’s cash outflow from investing stood at $3.8 billion in 1Q17, compared with $3.3 billion in 1Q16. Also, BP’s cash flow from financing was positive, as it raised fresh debt in the first quarter. Let’s look at why fresh debt was needed.
In 1Q17, BP had $2.1 billion in cash from operations. However, it had a cash outflow of $3.8 billion in the form of plant, property, and equipment additions, and $1.3 billion in the form of dividends, adding up to $5.1 billion of cash outflow. It had a cash flow shortfall of $3.0 billion (the difference between cash inflow of $2.1 billion and cash outflow of $5.1 billion). BP funded the shortfall by resorting to fresh debt. It raised $3.1 billion in net debt in 1Q17.
If we calculate BP’s shortfall as a percentage of its earnings capacity, in terms of cash flow from operations, it would stand at 143%. In comparison, Chevron (CVX) had a much lower shortfall of 38% in 1Q17. Contrarily, ExxonMobil (XOM) and Royal Dutch Shell (RDS.A) had surpluses of 26% and 27%, respectively. For more on this, read XOM, CVX, Shell, BP: Who Had a Better Cash Flow Position in 1Q17?
What to expect
BP’s robust upstream project pipeline is likely to bring in higher oil and gas production in 2H17. If oil prices rise, then considering BP’s strategy (optimizing capex, reducing cost structure, keeping Gulf of Mexico spill charges under control) and higher production, it should see higher earnings, improved cash flow, and better liquidity. However, if oil prices trend downwards, BP’s earnings, cash flow, and liquidity could be impacted. Therefore, going forward, as oil prices could determine BP’s financial flexibility and liquidity position, investors should watch them carefully.