Here’s a recipe for a successful third-quarter announcement: blend strong operating cash flows, wide refining margins, $2.34bn (£1.76bn) of downstream earnings and more oil and gas production than usual. Beat consensus forecasts by 18 per cent and break even at $49 a barrel of Brent. Add a recent surge in oil prices, dust with the promise of a share buy-back, and allow the stock to rise.
On most financial metrics, BP (BP.) had a good summer. But more illuminating than any internal measure was an average oil price of $52, broadly flat on the year. The market quickly connected the dots: if these prices now translate to an underlying replacement cost profit of $1.87bn, then surely $61 oil will mean pay day. Indeed, investors can probably expect the trend in the upstream division to continue, especially following recent start-ups in Trinidad, Oman and Australia. When the Zohr gasfield offshore Egypt starts producing in December, it will be BP’s seventh new project of 2017.
Still, the bulls might do well to temper their short-term enthusiasm. Chief among the drivers of third-quarter profit was BP’s downstream business, which almost matched the division’s total first-half earnings. With refining operations in the Gulf Coast left largely unaffected by September’s hurricane season, the oil major could fully benefit from an 18 per cent surge in average refining marker margins to $16.30 a barrel. Expect a “normal seasonal decline” in the fourth quarter.
The run-in to 2018 will also require more progress on the asset disposal programme. BP now expects to raise $4.5bn from sales this year, although just $1bn has been booked to date. And while $1.4bn is due from the sale of the SECCO joint venture in China, and another $0.7bn from the underwhelming spin-off of BP Midstream Partners, that still leaves a hole of more than $1bn. With full-year capital expenditure likely to clock in at $16bn, it's little wonder gearing remains stubbornly high at 28.4 per cent.
Following these numbers, Panmure Gordon upgraded its full-year adjusted earnings forecast to 29.3¢ a share, rising to 36.4¢ in 2018 (previously 23.8¢ and 35.7¢ respectively).
