BP results justify optimism
30th October 2018 12:59
by Richard Hunter from interactive investor
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After a sharp drop in the share price this month, buyers are returning following positive third-quarter numbers. Richard Hunter, head of markets at interactive investor, has the highlights.
BP has set the bar high for the oil majors in general, delivering a blockbuster set of earnings which have comfortably outpaced expectations.
The strength of the oil price over the quarter was of course a factor, particularly with BP's breakeven level pinned somewhere around $50 per barrel. A sharp spike in earnings coupled with an increasingly streamlined operation led to a 124% rise in replacement cost profit year on year and a 73% rise quarter on quarter.
This has provided an amount of cash which has several positive ramifications. The company now expects to pay for the BHP Billiton acquisition entirely in cash and without the need for equity, the monies which had been earmarked for the purchase will now be used to pay down net debt. Even then there is an ample surplus to increase the dividend and keep the share buyback programme on track.
The company is certainly not resting on its laurels to consolidate its position, with five major Upstream projects beginning life in 2018.
Meanwhile, the dividend yield of 5.9% is undoubtedly attractive and the fourth quarter numbers are likely to be bolstered further as the effects of the Billiton acquisition kick in for the first time.
Source: TradingView (*) Past performance is not a guide to future performance
There are niggles rather than concerns within the numbers, such as the fact that the Gulf of Mexico spill continues to rear its head, with another $500 million set aside for the quarter. The amounts being repaid are far from their historical highs, but nonetheless are a drain on resources.
The more recent weakness in the oil price make remove some of the sheen from the fourth quarter numbers, while the net debt figure remains high, albeit under control. In the meantime, even though the longer-term benefits are clear, the BHP acquisition could carry some execution risk.
In all, however, these numbers reflect a business which is back on its game and the initial share price reaction is understandably positive. This adds to some strength over the last year, during which time the shares have risen 7.5%, as compared to a 6% decline in the wider FTSE 100.
It seems that, yet again, BP has justified its market consensus rating as a 'strong buy'.
*Horizontal lines on charts represent levels of previous technical support and resistance. Red line represents uptrend since 2016.
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