- BP to start $500m buyback programme in coming weeks
- Profits soar in March quarter
Oil and gas major BP (BP.) will launch a share buyback programme after its first quarter profits surged on the back of the higher oil price. The company’s underlying replacement cost (RC) profit, its preferred profit measure, was $2.6bn (£1.9bn), compared with $115m in the December quarter and $791m a year ago. This was also well ahead of the consensus forecast of $1.5bn.
The oil price recovered on the back of increased demand and Opec cuts, although these are now being wound back. Brent crude moved close to $70 per barrel (bbl) in March, and has settled at around $65/bbl.
BP's strongest division in the quarter was ‘gas and low carbon energy’. Here, underlying RC profit before interest and tax rose from $154m in the December quarter to $2.3bn. BP said “exceptionally strong” gas trading and marketing and lower depreciation and depletion had contributed to the jump in profits.
“With the acceleration of divestment proceeds, together with strong business performance and the recovery in the price environment, we generated strong cash flow and delivered on our net debt target around a year early,” said chief executive Bernard Looney.
The initial buyback scheme amounts to $500m, which will offset dilution from employee share handouts, with the larger policy of returning 60 per cent of surplus free cash flow to be announced in detail later in the year. The company warned that it would be unlikely to have surplus cash flow in the June quarter because of its annual $1.2bn Macondo payment.
The Opec-plus group of countries is meeting this week. Previous expectations around increasing supply are now less certain because of the Covid-19 situation in India. Saxo Bank head of commodity strategy Ole Hansen said that oil would probably remain between $60/bbl and $70/bbl as demand falling in Asia balances out recoveries elsewhere.
BP and the other oil majors have recovered much faster than anticipated, and this result being so far ahead of forecasts indicates that the other majors will have good news to report as well. Looney said it was proof that BP's plan to shift towards a broader energy portfolio while staying profitable was working, but the combination of large divestments and a strong uptick in oil and gas prices seems unlikely to repeat. We remain sceptical about BP’s long-term investment case, however. Sell at 299p.
Last IC View: Sell, 260p, 2 Feb 2021
