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BP - Production and prices make for slick results

Nicholas Hyett | 5 February 2019 | A A A
BP - Production and prices make for slick results

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BP Plc Ordinary US$0.25

Sell: 507.20 | Buy: 507.40 | Change 2.60 (0.51%)
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BP saw full year underlying profits more than double year-on-year to $12.7bn, with results improving across all divisions. That reflects a significant improvement in oil prices and slight uplift in production.

The fourth quarter dividend of 10.25 cents was 2.5% higher than last year.

The shares rose 3.6% in early trading.

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Our view

BP has spent the best part of a decade 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 history books.

Deepwater Horizon payments are still soaking up mind boggling sums, $3.2bn last 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.

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 comfortably above that for most of the last year, 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 6%.

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.

The deal means the balance sheet's still a bit stretched, so investors should still have one eye on the oil price. But as things stand BP looks in good shape, and the combination of organic growth and disposals means there's scope for substantial returns to shareholders.

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Full Year Results

Upstream production rose 3% year-on-year to 2.5m barrels a day. That reflects major new projects in the North Sea, Egypt, Russia, Azerbaijan, the Gulf of Mexico and Australia.

Combined with a 22.9% increase in average oil & gas prices that led to a 148% increase with underlying upstream profits, which reached $14.6bn.

Underlying Downstream profits rose 8.5% to $7.6bn, including a record fourth quarter. The Fuels division was the main driver of success, benefitting from enhanced convenience offerings across the petrol station network, while the roll-out of Mexican retail sites is also continuing at pace.

The Lubricants divisions slightly underperformed last year, as rising oil prices dragged on performance, while Petrochemical's saw margins improve.

BP's Rosneft stake delivered an underlying profit of $2.3bn, a 177% increase year-on-year driven largely by higher oil prices.

Total capital expenditure rose 40.6% year-on-year to $25.1bn, following the purchase of BHP Group's US onshore assets. Excluding M&A activity, capital expenditure fell 8.2% year-on-year.

BP completed $3.5bn in divestments during the year, and intends to complete a further $10bn over the next 2 years to help fund the BHP acquisition.

Next debt at the year end stood at $44.1bn, 16.7% ahead of the year before, with a gearing ratio of 30.3%. That's slightly above the group's 20-30% target, but is expected to return to the middle of that range by 2020 thanks to organic free cash flow and disposal proceeds.

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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.

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