BP & Oil Both Had Bad Days

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What's going on?

BP, the UK-listed energy company, reported second-quarter profits on Tuesday that were 45% lower than last year and lower than investors were expecting.

What does this mean?

The oil price has declined sharply in the past few years. Like many energy companies, BPs response included a major cost-cutting drive aimed at lowering its break-even price of drilling oil (e.g. the oil price at which it neither makes nor loses money). BP repeated its assurances that, at an oil price of at least $50-55, it will be able to keep paying its current annual cash payout to shareholders (e.g. its dividend) and keep investing in new production at a rate that it views as appropriate to drive future growth. If oil is able to recover to that level, BP (and many others) would be in decent shape but with oil falling below $45/barrel this week, the oil price recovery is looking more doubtful.

Why should I care?

The bigger picture: The oil price is looking vulnerable.
There are likely two major factors hurting the oil price right now: US production looks like it’s starting to increase again after months of decline and the US dollar has gone up in value versus other currencies (which, since oil is priced in dollars, makes oil more expensive for non-Americans to buy and thus puts downward pressure on its price click here for a full explanation).

For the stock: BPs stock price is helped by the pounds decline but hurt by a lower oil price.
BP makes its money by selling oil which is priced in US dollars. So when the value of the pound declines, like it has since the Brexit vote, BP makes more pound-denominated profit because its dollar earnings are worth more when translated into the (weaker) pound. So, when looking at BP from the standpoint of a UK-based investor, theres a confusing confluence of currency impacts on the stock price (e.g. dollar up = oil price down, oil price down = BP stock down, and pound down = BP stock price up all other things being equal).

Originally posted as part of the Finimize daily email.

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