Refined outlook

BP and Total find downstream respite

The steep descent of the oil price isn't all bad for the big integrated oil companies. Strong results from refining and marketing limited the fall in profit at both BP and Total in 2015's first quarter. With the price of a barrel of Brent crude down 50 per cent from the previous year, these gains are welcome. But they may not be sustained.

The British company reported underlying first-quarter profit of $2.6 billion, about double analysts' expected $1.3 billion. That was a relatively modest 20 per cent decline from the previous year. Even adjusting for a one-off tax credit, Barclays estimates net income was still 31 per cent above consensus.

Refining did better than expected at BP. Input costs - crude oil - fell more than the price of petrol and other products. At French Total, adjusted net income from refining and chemicals more than tripled from the first quarter last year to $1.1 billion.

The fillip may be relatively short-lived. Even though Europe's oil giants, including BP, have downsized their refining units in recent years, Total expects structural overcapacity to weigh on profit margins in the medium term.

Lower oil prices may eventually restrict supply, but BP and Total are boosting production: Total by an impressive 10 per cent. However, the low oil price is hurting cashflow. After the most generous adjustment for working capital and Gulf of Mexico spill payments, BP's operating cashflow was about $5 billion, less than the $6 billion disbursed on capital expenditure and dividends. The ratio of net debt to total capital crept up to 18.4 per cent, nearing the company's self-imposed 20 per cent target.

To sustain dividends, it is imperative to keep spending under control. Investors believe that both BP and Total are on the right track. Their shares have risen around 17 per cent this year - better than peers.

Speculation that BP could be a takeover target, despite British political resistance, may have helped the shares. However, the market is not getting carried away. Morgan Stanley estimates BP's 2015 dividend yield at a generous 5.5 per cent. Total's is 5.1 per cent. That seems about right for companies which remain in urgent need of self-help.