BP in a giving mood

BP (BP.) followed the lead of its supermajor stablemate Shell (SHEL) by announcing a double-digit hike in the second-quarter dividend and throwing another $1.5bn (£1.2bn) share buyback into the bargain.

You could describe it as a sop for shareholders because it was obvious that adjusted profits were going to compare unfavourably with the halfway point in 2022 due to the fall in hydrocarbon prices. The returns to investors were clearly supportive of the group’s share price on results day, as its underlying replacement cost profit (BP’s preferred measure) for the second quarter of $2.6bn was 69 per cent down on the 2022 equivalent, missing analysts’ expectations in the process.

The consensus miss wouldn’t have come as a great surprise given the performance of industry peers in recent months, although the second-quarter shortfall was pronounced. The effective tax rate was higher than analysts had predicted, and the group had to contend with falling refining margins. A relatively high level of maintenance work also weighed on profitability, along with a disappointing oil trading performance.

Ultimately, however, the group’s financial performance is intertwined with energy prices. The decline in prices is also borne out in the 42 per cent reduction in net cash flow to $6.29bn. Capital expenditure over the second quarter came in at $4.3bn including $1.1bn for the acquisition of TravelCenters of America. With investing activities bubbling up through the quarter, management is guiding for full-year inorganic capital expenditure of $16bn-$18bn. Assuming an average Brent crude price of $60 a barrel, BP expects to be able to deliver share buybacks of around $4bn a year and have capacity for a 4 per cent annual increase in the dividend.

Aside from the maintenance issues, operational performance was solid. BP now expects that upstream production will be higher compared with 2022, helped along by four major project start-ups, although the Tortue LNG project has slipped into the first quarter of next year. However, the group has seen the start-up of the BP-operated Mad Dog Phase 2 project and the Reliance operated KG D6-MJ project, which together should add around 90,000 barrels of oil equivalent (net) per day by 2025 – equivalent to around 10 per cent of current production levels .

UBS expects net earnings of $16.4bn for the full year, falling to $14.8bn in 2024.

The expected rise in production should support financial performance even if energy prices moderate to a degree. That’s important because exploration expenses are on the rise and the group appears to be prioritising shareholder returns. There’s a decent income case to be made here, but we remain neutral on prospects for the capital value. Hold.

Last IC View: Hold, 497p, 07 Feb 2023