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BP - Rising production and a record downstream performance

Nicholas Hyett | 31 October 2017 | A A A
BP - Rising production and a record downstream performance

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BP Plc Ordinary US$0.25

Sell: 506.00 | Buy: 506.20 | Change -1.90 (-0.37%)
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Rising production and a strong downstream performance saw underlying profits before tax rise 62% quarter-on-quarter to $3.5bn.

The dividend remains unchanged at 10 cents per share, with the group announcing a share buyback programme to offset ongoing dilution from paying a portion of the dividend in shares.

The shares rose 3.3% in early trading.

Our View

BP has spent the past seven years addressing big problems , with first the Gulf of Mexico disaster and then the oil price crash throwing the group into disarray. But those headwinds are slowly moving from newspaper pages to the history books.

Gulf payments are still soaking up mind boggling quantities of cash, but are finally starting to recede. New oil fields are coming online, supporting cash generation from the group's upstream business. Meanwhile the Downstream business, which has been BP's rock throughout much of the oil downturn, continues to deliver excellent results.

The share buyback programme, announced alongside third quarter results, is the first bone for investors. It should offset the effects of a scrip dividend which has been very dilutive, seeing the company issue $2.8bn of shares last year.

But there's still lots to do before BP's back in rude health.

The group has to rustle up a further $1.4bn of disposals if it's to hit its $4.5bn target for this year. At almost $40bn, the debt pile is still huge and paying it down seems likely to soak up much of the cash freed up by the falling Gulf of Mexico payments. That could well hold back dividend growth - although with shares currently trading on a prospective yield of 5.9% that might not be too much of a problem.

Still it's at least possible to see BP's route through to happier times from here. The oil giant now matches sources and uses of cash at slightly under $50 a barrel, and Brent is trading at around $60. With production set to rise again next quarter, BP should be able to get its house in order.

Unfortunately, as is always the case with natural resources, BP's fortunes are determined by a global commodity market over which it has no control. It should be in a better position to weather a storm in a year or two's time, but recent history has shown the oil price to be anything but predictable.

Third quarter trading update

Operating cash flow in the third quarter hit $6bn, with cash flow from the first nine months exceeding organic capital expenditure and the full dividend. This is equivalent to a breakeven Brent oil price of $49 a barrel, or $42 a barrel if only the cash portion of the dividend is included.

Gulf of Mexico oil spill payments were $0.6bn in the quarter, significantly lower than the first two quarters. BP has now made total payments of $4.9bn this year, with full year payments expected to be in the region of $5.5bn.

Oil and gas production in the third quarter averaged 3.6m barrels of oil a day, 14% higher than a year earlier. This reflects the start of production at three major upstream projects and drove a 120% quarterly increase in upstream profits to $1.6bn. That was delivered despite a slight decline in the average price received for the group's oil and gas, down 1% to $33.23 per barrel of oil equivalent.

The downstream business, which includes BP's refining and sales operations, delivered profits of $2.3bn in the quarter, the highest for five years and up 65% on the previous quarter.

BP's Rosneft stake contributed $137m to profits in Q3, less than half of the previous quarter but slightly ahead of this time last year.

The group continues to target $4.5bn of asset sales for the full year, of which $1bn have already been completed. The group has visibility on $2.1bn of further sales in the fourth quarter.

Net debt remains high at $39.8bn, with a net debt ratio (debt as a percentage of total capital) of 28.4%.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.