ii view: BP makes huge profit, so why have its shares slumped?

Pursuing a mix of both traditional and low carbon energies and offering a forecast dividend yield of over 4%. Buy, sell, or hold?

First-quarter results to 31 March

• Underlying replacement cost profit up 3.3% from the previous quarter to $4.96 billion (£3.97 billion)
• Net debt down 23% year-over-year to $21.2 billion (£17 billion)
• Dividend of 6.61 US cents per share, up from 5.46 US cents in Q1 2022
• A further share buyback programme of $1.75 billion (£1.4 billion)

Chief executive Bernard Looney said:

“This has been a quarter of strong performance and strategic delivery as we continue to focus on safe and reliable operations. Momentum continues to build across our integrated energy company strategy. And importantly we continue to deliver for shareholders, through disciplined investment, lowering net debt and growing distributions.”

ii round-up:

Oil giant BP (LSE:BP.) today detailed profits ahead of City forecasts given strength at its oil and gas trading business, but lower than expected shareholder returns.

Profit rose to $4.96 billion during the first quarter of 2023, up from $4.8 billion in the final quarter of last year and ahead of forecasts for nearer to $4.3 billion. However, a share buyback programme of $1.75 billion for the current second quarter fell below hopes for closer to $2 billion and was down from $2.75 billion the previous quarter. 

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Shares in the FTSE 100 major fell 5% in UK trading having come into this latest news up by more than a third over the last year. That’s similar to US mammoth Exxon Mobil Corp (NYSE:XOM) and ahead of a 15% gain for close rival Shell (LSE:SHEL). The FTSE 100 index itself is up by around 4% over that time. 

BP has already begun a new strategy to become an Integrated Energy Company (IEC), increasing its production of low carbon energies and reducing focus on hydrocarbon production.

Strategic developments during the quarter included taking a 40% stake in the Viking carbon capture and storage project in the North Sea. It is also expanding its electric vehicle charging exposure via a global mobility agreement with taxi operator Uber Technologies Inc (NYSE:UBER). 

BP also started its Mad Dog Phase 2 oil and gas project in the Gulf of Mexico and a new gas focused joint venture with the Abu Dhabi National Oil Company (ADNOC). 

A dividend of 6.61 US cents per share is up from the 5.46 US cents per share at the start of 2022. Group net debt of $21.2 billion compares to $27.5 billion this time last year. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares following the announcement. Second-quarter results are scheduled for 1 August. 

ii view:

Founded in 1901, oil major BP today operates across four arenas. Production and operations account for its core hydrocarbon operations. Customer and products combine its Castrol lubricants, aviation fuelling, and retail forecourt or ‎convenience sites. Gas and low carbon energy integrate its natural gas capabilities with low and zero carbon businesses and markets, while innovation and engineering is home to its safety and operational assurance authorities. 

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For investors, the uncertain economic outlook and its potential impact on energy demand cannot be overlooked. Energy prices have in recent years proved highly volatile, global warming and climate change concerns are not going away, while government windfall taxes remain firmly on the agenda given the current cost -of-living crisis.

More favourably, energy majors have become accustomed to dealing with energy price volatility. A diversity of operations exists, ranging from hydrocarbon production to windfarms, strong cashflow generation has enabled net debt to be reduced, while continued share buybacks sit alongside a forecast future dividend yield of over 4%.   

On balance, and while the price of oil is likely to remain volatile, a consensus analyst estimate of fair value standing at over 600p per share is likely to keep long-term fans of BP sitting tight. 

Positives: 

• Pursuing an Integrated Energy Company strategy 
• Focus on shareholder returns

Negatives:

• Climate change concerns  
• Highly uncertain economic outlook

The average rating of stock market analysts:

Buy