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StockBeat: BP's Resilient 3Q Overshadowed by Aramco IPO

By Geoffrey Smith -- Investors fearing a bloodbath for Big Oil after a rocky third quarter for crude prices may be reassured – a little – after BP (LON:BP) kicked off earnings season with figures that were modestly ahead of expectations, but nonetheless overshadowed by news elsewhere.

The shares fell by 2.7% by 5:30 AM ET (0930 GMT), but that was less a reflection of the results than of the news that Saudi Aramco is planning to begin marketing its IPO on Sunday. That’s causing investors to make room in their books for the new stock by paring existing holdings.

BP (LON:BP) had done its best to massage expectations lower in the weeks leading up to the announcement, most notably warning of an impairment charge of up to $3 billion in respect of the disposals it announced during the quarter (the legacy gas assets at BPX Energy first and foremost). As it turned out, BP actually reported an impairment of $2.6 billion, well below the maximum feared.

There was no escaping the impact of lower prices, however. U.S. crude had ranged between $68 and $74 a barrel a year earlier, but the global economic slowdown and fears of oversupply kept it stuck in the mid-50s all through this summer. As a result, underlying replacement cost profit – BP’s preferred measure – fell by over a third to $2.25 billion. The reported bottom line swung to a loss of $749 million. Operating cash flow stayed at a still-healthy $6.5 billion, thanks to better-than-expected performances from Rosneft and from its downstream operations.

The reported loss was of less concern than an unwelcome rise in gearing, as the asset disposals failed to bring down net debt significantly. Gearing, which measures net debt as a proportion of a company’s entire value, rose to 31.7% from 31% three months earlier, moving away from the targeted range of 20%-30%. Chief financial officer Brian Gilvary said he expects it to stay above 30% through the end of the year (even though the group expects to sell nearly $3 billion more in assets by then), before falling to around 25% next year. That reflects BP's optimism that it can continue to generate enough cash to cover both capex and dividends at current prices and still have something left over to strengthen the balance sheet.

Elsewhere, all of Europe’s main indexes were in the red. The FTSE 100 was down 0.4%, while the German DAX was down 0.3%. The benchmark Stoxx 600 was down 0.5% at 396.58.

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