Be prepared

BP is making the best of a bad situation. There is clear progress on bringing down costs and capital expenditure. But with the oil price at nearly a six-month low of $53 a barrel for Brent crude, it's only going to get harder for the UK oil major.

The company reported a large loss in the second quarter, thanks to a $10.8 billion charge related to its recent settlement with the US government over the 2010 oil spill in the Gulf of Mexico. Underlying profit is more relevant for gauging the company's health. At $1.3 billion, it was 64 per cent lower than in the same quarter last year.

BP has more problems than most of its peers. The Gulf of Mexico nightmare is ending, at a total cost of $54.6 billion, but in the most recent quarter it wrote off nearly $600 million of exploration assets in Libya. Operations were mixed. Refining margins were strong, but profit from the upstream production operations was weak, with a small loss in the United States.

The company isn't sitting on its hands. Chief Executive Bob Dudley says he is positioning the company for a period of weaker prices. That is reassuringly realistic. Actions are matching words. BP has managed to cut $1.7 billion in costs in the first half of the year. Capital expenditure plans were also trimmed slightly, to below the previously promised 13 per cent annual decline.

BP just managed make ends meet in the second quarter. Operating cashflow of $6.3 billion was enough to cover the $6.2 billion disbursed on organic capital expenditure and dividends, though it included a $0.5 billion working capital release. Net debt, helped in part by small disposals, was slightly down in the quarter. The ratio of net debt to total capital stands at 18.8 per cent, nearing the company's self-imposed 20 per cent target.

A dividend yield of 6.7 per cent suggests investors don't believe BP will be able to keep up the balancing act. But the company is working hard to deserve the benefit of the doubt.