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BP gives it both barrels

BP bulls can feel vindicated by these results, which again surpassed expectations
February 6, 2018

Sometimes, you can’t catch a break. Obscured by Tuesday's sell-off in equities, BP (BP.) dropped a set of numbers that chief executive Bob Dudley hailed as the oil giant’s “best results in recent history”. His comments are justifiable. Including further atonement for the Gulf of Mexico spill, operating cash flow jumped 77 per cent to $18.9bn (£13.5bn) in 2017. Elsewhere, upstream production swelled 12 per cent, and a successful year of exploration added 1bn barrels of oil-equivalent to reserves.

IC TIP: Hold at 475p

But BP shares were marked down in trading that saw falls for most blue-chip stocks – and the oil price headed in the same direction. Perspective should trump short-term gyrations. With Brent crude at $67 – more than a fifth above last year’s average marker – BP shareholders can feel as optimistic about 2018 as their company's directors. One leading indicator of boardroom sentiment is guidance for another $15bn-$16bn of organic capital expenditure this year. That follows $16.5bn of investments in 2017, during which time seven major growth projects arrived, mostly under budget.

Another six should start in 2018, thereby increasing output by up to 7 per cent. Also on the up are depreciation charges and the effective tax rate, although BP remains confident it can balance free cash flow at $50 a barrel.

It’s tempting to contrast this bullishness with the more tempered approach of FTSE 100 rival Royal Dutch Shell (RDSB). Such comparisons will be more meaningful once Deepwater Horizon payments are removed from BP’s profit-and-loss account, although the 'tapering' of dues remains slow. Expected settlements for 2018 and 2019 – more than $3bn and “around $2bn”, respectively – are both $1bn up on last year’s guidance.

That has been a protracted burden on BP’s net debt, which expanded 6.5 per cent in the year to $37.8bn. BP’s own gearing ratio of 27.4 per cent, calculated by adding debt back into net assets, is skewed to the top end of its target range, and added 24 per cent to finance costs in 2017. But such insouciance might be the oil major’s way of saying it sees boom times ahead, as might the $343m of shares retired in the fourth quarter – which reportedly (and encouragingly) offset dilution by the scrip dividend.

On average, analysts expect $14.9bn pre-tax profit and adjusted EPS of 44.7¢ in 2018, compared with estimates of $10.3bn and 30.7¢ last year.

BP (BP.)    
ORD PRICE:475pMARKET VALUE:£94.7bn
TOUCH:474.9-475.3p12-MONTH HIGH:536pLOW: 437p
DIVIDEND YIELD:6.3%PE RATIO:39
NET ASSET VALUE:494¢*NET DEBT:38%
Year to 31 DecTurnover ($bn)   Pre-tax profit ($bn)Earnings per share (¢)Dividend share (p)
201337930.212423.40
20143544.9520.623.85
2015223-9.57-35.426.38
2016183-2.300.6129.42
20172407.1817.230.98
% change+31-+2720+5
Ex-div:15 Feb   
Payment:29 Mar   
£1=$1.40. *Includes intangible assets of $29.9bn, or 150¢ a share.