- Underlying earnings stable on record-breaking Q2
- Buyback programme of $2.5bn announced, below analyst forecasts
BP (BP.) has kept the gravy train rolling through its gas trading arm, maintained profits courtesy of the September quarter and announced another $2.5bn (£2.2bn) in share buybacks. The underlying replacement cost profit, BP’s preferred profit measure, was $8.2bn for the quarter, only slightly behind the second quarter (Q2) and almost triple the figure from a year ago.
This was also a third above analyst expectations, driven by the “exceptional” trading result in the gas business.
In a sign of the political pressure on the energy majors, the company specified it had paid an extra $800mn in tax due to the Energy Profits Levy. Shell (SHEL) did not pay any new taxes because of the levy’s 100 per cent capital investment offset provisions.
BP did report a slowdown in earnings from its refining business and a flat result for oil, given the lower price in the September quarter, but the gas and low carbon energy division saw its underlying RC profit double compared with the June quarter to $6.2bn. On a reported basis, the earnings were wiped out by $9bn of adjustments.
Chief financial officer Murray Auchincloss said there had been “quite a bit of demand destruction” in Europe within the gas market through the period, and that this had continued into October. The EU is also finalising details of an energy windfall tax, which will likely include a higher tax on fossil fuel companies as well as potentially a cap on gas prices. Auchincloss said EU profits were about 5 per cent of the company’s total, compared with 15 per cent from the UK. Service station earnings were up 67 per cent on the second quarter, to $1.1bn.
The gas demand destruction had less of an impact in the US, where gas is cheaper.
There has been some constraint on BP's liquefied natural gas (LNG) exports from the US because of the continued outage of the Freeport terminal. This made the gas trading result “particularly impressive”, said RBC Capital Markets analyst Biraj Borkhataria.
Shareholders will see continued high levels of returns, although this quarter’s buyout programme of $2.5bn is down $1bn on the previous period. BP’s payout policy is 60 per cent of surplus cash flow going to buybacks, with a medium-term forecast of around $4bn a year. BP has far exceeded that level this year, with an expected total of just over $10bn worth of shares repurchased by the end of the current quarter.
The outlook for BP and the other supermajors is unclear, although there will likely be volatility within energy markets for at least another year.
The recent warmer weather in Europe has led to greater confidence in gas supplies proving adequate over the winter, sending prices down, but the following winter should be more difficult as there will be little or no gas imports into Europe from Russia next summer to put into storage.
The oil market has more certainty of supply, although Opec is keen to keep prices at $100 a barrel. Saudi Aramco (SA:2222) reported Q3 net income of $42bn, down from $48bn in the second quarter but 40 per cent ahead of last year.
We have a hold rating on BP and no recommendation on Saudi Aramco, given its local listing and limited free float.
Last IC View (BP): Hold, 441p, 1 Sep 2022
