BP hikes buyback as government calls for higher production

BP hikes buyback as government calls for higher production
  • Buyback plan $1bn higher than analyst expectations
  • Underlying profit climbs on oil and gas prices and trading performance

BP (BP.) has both increased its buyback programme and given the UK government a forecast local spend out to 2030 of £18bn, in a bid to stave off anger over its decade-high profits from sky-high oil and gas prices. 

The energy major hit a 10-year high for quarterly underlying replacement cost (RC) profits in the March quarter, at $6.2bn (£4.9bn). This was almost 40 per cent ahead of analyst expectations. BP also reported huge losses on a reported basis, however, because of $24bn of writedowns linked to the proposed sale of the 19.75 per cent holding in Rosneft (RU:ROSN)

Massive profits in the sector have come under scrutiny from the government given the impact of high oil and gas prices on household budgets. Business, energy and industrial strategy minister Kwasi Kwarteng said the government would back further production in the North Sea from BP and others but expected profits to be put back into UK projects. 

“I would like you to set out how you will reinvest profits, double down on investments in the clean energy transition and importantly accelerate and maximise domestic oil and gas production,” Kwarteng said in a letter to industry bosses. He added after BP announced its Q1 numbers that it was “right [BP is] reinvesting profits back into the UK”. 

Despite that positive response, the major has stuck with its payout policy.

Another $2.5bn will go toward buybacks, ahead of analyst expectations of around $1.5bn. The group’s shareholder return policy sees a 4 per cent dividend increase annually and 60 per cent of surplus cash flow to go towards buybacks. 

Chief executive Bernard Looney did outline £18bn of investment to go into the UK in the next eight years, however, and said the country would see a larger share of capital spending in the coming years. He said this would shift from 10-15 per cent of the annual spend of around $14bn to 15-20 per cent. 

More broadly, Looney said he did not expect the wild ride the energy sector is experiencing to end in the short term. “We’re probably in a world where volatility will continue to be the order of the day,” he said. But this did not mean BP would throw more cash at production. “Discipline [also] remains the order of the day,” he said. 

The trading division saw the biggest quarter-on-quarter increase, from a $26mn underlying RC loss before interest and tax in Q4 to $1.6bn profit in Q1. RBC Capital Markets analyst Biraj Borkhataria noted seeing strength in both oil and gas trading divisions was rare. “BP has previously reported exceptional gas trading in 1Q20, and exceptional oil trading in 2Q20, but not both at the same time,” he said. 

BP management was keen to emphasise this division’s role in distributing oil and gas around the world when markets were tight.

Looney also said on an analyst call the company’s refineries were running “flat-out” to keep refined product supply as high as possible. He also said BP’s four European refineries were now “clear of Russian molecules” but also warned of oil supply challenges when more Russian exports are taken out of global markets, estimated another hit of 1mn barrels of oil per day (bopd), around 1 per cent of global supply. 

BP’s outlook for the rest of the year is good. Given the level of surplus cash flow, buybacks could start causing liquidity issues - management said the board would be considering this throughout the year - so the company could have to balance capital “discipline” with share trading practicalities if oil and gas prices stay so high. Additionally, some of the Rosneft writedown may be reversed if BP can get anything for the stake in a sale, as the $13.5bn pre-invasion carrying value was written down to zero. 

Zooming out, BP sticking to its plan to rapidly increase green spending while maintaining oil and gas production still has plenty of questions attached, especially given Downing Street is desperate for help on the energy cost crisis. It is the same for US majors as well, with the White House pushing back against industry efforts to avoid setting up a bust by upping production significantly. This leaves Looney and co. between a rock and a hard place.

We remain sceptical of BP making it through this difficult transition period with even its fairly low current valuation intact. Sell at 401p.

Last IC View: Sell, 353p, 28 Feb 2021