BP plc reported this morning and most of the news is bad. The share is off 4.5% as a result. The UK oil major earned a $72 mn profit in Q4 compared to a $2.2 loss a year earlier, but that barely marked a real turnaround, as over the full year it lost $999 mn., vs $5.2 bn in 2015, the second year in a row where BP was in the red. We are using the “replacement cost” as a proxy for net loss, which is standard in the oil industry. The replacement cost profit came to $2.59 bn, vs $5.2 bn in 2015, the second year in a row where BP was in the red. Using the “replacement cost” as a proxy for net loss is standard in the oil industry but Reuters reported that his number was the lowest in 10 years in 2016 so apparently the drop was not real. I do not know how this metric is worked out.

BP's cash generation fell 13% in Q4 and 24% in the full year. CEO Bob Dudley claimed that BP cut its “controllable” cash costs by $7 bn from 2014 last year, a year ahead of schedule.

Furthermore, BP said that its break-even oil price this year would be $60 per barrel (Brent), up from its earlier estimate (at its Q3 2016 conference call) of $50-55/bbl. The rise is because of the spate of new investments it made at the end of last year which we heralded (wrongly) as a sign that BP was doing better and had cash to invest $1 bn in new projects and fields. Instead it turns out that BP just simply borrowed more money, admittedly at low interest rates, to go shopping.

It used $35.5 bn of new debt to pay its generous dividend in 2016, up from a mere $27.2 bn in 2015. The shopping spree included a chain of gas stations and a 10% stake in Abu Dhabi's oil fields.

Now the new sites have to be developed and this will increase its capex in 2017 to $16-17 bn, up from the prior quarter estimate of $15-17 bn. CFO Brian Gilvary expects this year's oil price to be ~$50 and forecast that cash flow will be $21-22 bn this year.

Adding to BP's woes, the crude cargo and oil trading business which kept BP buoyant over the past few years last year lost $70 mn because it lost a Moroccan refinery's default. The Samir refinery failed to pay for a Urals crude delivery from Russia and BP was ordered to pay. It had sought to pass on the debt to the National Bank of Abu Dhabi but the London High Court said this was not allowed so BP had to pay the Emirates bank.

BP paid out $7.1 bn in fines (before tax) on the 2010 Deepwater Horizon disaster last year. It has paid out $62.66 bn so far and its CFO expects payments of $4.5-5.5 bn this year; $2bn next year; and just over $1 bn in 2019.

Analysts were almost as shocked as I am and Rohan Murphy (of Allianz, who owns BP) told Dow Jones that “results are weak whichever way you look at them” arguing that BP needs to generate more cash flow to cut its leverage.