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BP - Profits gush and cash flows

Nicholas Hyett | 30 October 2018 | A A A
BP - Profits gush and cash flows

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BP Plc Ordinary US$0.25

Sell: 347.05 | Buy: 347.20 | Change 5.65 (1.66%)
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Underlying profit in the third quarter more than doubled to $3.8bn (2017: $1.9bn), with both Upstream and Rosneft delivering substantial growth thanks to higher oil prices. Underlying profit before tax and finance costs rose 91% to $6.7bn. announced the acquisition of $10.5bn of US shale assets from BHP.

Improved cash generation means BP now expected to fund the entire BHP US shale deal with available cash and no longer intends to issue new shares.

The shares rose 3.7% on the news.

The quarterly dividend of 10.25 cents per share is 2.5% ahead of last year.

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Our view

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

Deepwater Horizon payments are still soaking up mind boggling sums, $2.9bn so far this year, but are finally starting to shrink. New oil fields are coming online, with the extra production supporting cash generation in Upstream. Meanwhile the Downstream business, which has been BP's rock throughout much of the oil downturn, continues to deliver excellent results ahead of expectations .

With profits now firmly back in positive territory, the focus has turned to cash.

Cash is the money companies actually have in the bank to service debts, invest in growth and pay dividends. BP reckons it can match its cash in to cash out with oil at $50 a barrel, and with oil now trading at something more like $75, that gives it options.

The share buyback programme was the first bone for investors, offsetting a scrip dividend which has been very dilutive, and saw the company issue $1.7bn of shares in lieu of cash dividends in 2017. A return to dividend growth, albeit modest, is the second, with the shares currently offering a prospective yield of 5.9%.

The group's also flexing its financial muscles in M&A, with the acquisition of a huge shale portfolio from BHP. An existing US onshore business, in which it has achieved some impressive cost savings, should give BP the expertise and opportunity to achieve $350m in planned cost and revenue synergies.

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Third quarter results

Upstream, which includes BP's oil and gas assets, saw quarterly production remain broadly unchanged at 2.5 million barrels of oil equivalent per day (boepd), although production rose 6.8% once portfolio changes are taken into account. The division benefitted from a 38.9% rise in average prices, with the result that underlying profits rose 156% to $4bn.

The Downstream business, made up of BP's refining and sales operations, saw underlying operating profits fall 9.7% in the quarter to $2.1bn. Weakness in Fuels and Lubricants offset a strong Petrochemicals result, where profits rose despite volumes falling.

BP's stake in Rosneft delivered underlying profit of $872m, up from $137m last year. That was largely driven by price increases, with total production rising just 2.8% to 1.2m boepd.

Payment relating to the Gulf of Mexico oil spill fell slightly to $0.5bn. Year to date the group has paid out $2.9bn relating to the incident, with the full year total expected to be $3bn.

Third quarter operating cash flow after Gulf of Mexico payments reached $6.1bn, up slightly on the $6bn reported this time last year. Total capital expenditure was down slightly on last year at $4.4bn.

The deal with BHP is expected to complete on 31 October. Since it will be funded entirely from existing cash, £5-6bn in proceeds from divestments will now be used to reduce debt.

Net debt fell $0.6bn from this time last year to $39.2bn. Gearing, which measures debt as a percentage of total capital, fell 0.9 percentage points to 27.5%. Gearing may move above the 20-30% target band following the deal to acquire BHP's shale assets, but is expected to move back towards the middle of the band by the end of 2019.

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