BP announces ‘best in class’ second-quarter profits

BP (BP) outpaced even the heady expectations for its June quarter as energy prices remained cripplingly high, beating profit estimates by a quarter and resulting in a 10 per cent dividend uptick. 

The oil and gas major reported an underlying replacement cost (RC) profit, its preferred measure, of $8.5bn (£7bn) for the June quarter. This was also a third ahead of the equivalent first-quarter figure. Additionally, the first-half underlying RC profit of $14.7bn was almost triple last year’s figure. 

Management has decided to lift the quarterly profit to 6¢ a share from 5.46¢, which chief executive Bernard Looney said was down to the lower bill thanks to buybacks cutting the share count and lower debt reducing interest payments. The dividend was “anchored in a $40 a barrel world”, he added. Jefferies analyst Giacomo Romeo said BP had likely managed “the best set of numbers in the sector this quarter”. There was some competition for this: the results follow record quarters for Shell (SHEL), Chevron (US:CVX) and Exxon Mobil (US:XOM). 

The major profit uplift for BP came from the customers and products division, which covers BP’s retail outlets. Its underlying RC profit was almost double that of the March quarter, because of refining margins and an “exceptional oil trading contribution”. RBC Capital Markets analyst Biraj Borkhataria said this trading result had largely driven the profit beat. 

On the retail side, Looney noted diesel sales as climbing in the US, while aviation fuel also showed signs of recovering to closer pre-pandemic levels. The convenience business was doing “relatively well”, he said, logging “one of the strongest quarters we’ve had”, when adjusted for foreign exchange movements. 

The profit-driving conditions look to remain favourable for some time. BP said refining margins would likely remain high due to ongoing supply disruptions, while upstream production would be flat compared with 2021. 

Looking at the demand side, there is now an element of demand destruction in play as consumers struggle with petrol and diesel prices on top of higher energy bills and other cost of living increases. 

But any rapid fall-back in oil and gas prices is unlikely, and forecasts are for supply issues to continue through winter, especially in Europe, where gas prices are even higher.  BP felt this in Q2: CFO Murray Auchincloss said the company’s European refineries were “quite suppressed” in terms of profits but added they were geared more toward providing supply “for society”. 

Looney’s now infamous comment about BP being a “cash machine” last year remains apt. That machine is now supercharged. Our long-term negative call on the company remains, but there are plenty of returns for shareholders on offer for the next year. Sell. 

Last IC View: Sell, 401p, 3 May 2022