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BP - Results broadly as expected

Nicholas Hyett | 30 April 2019 | A A A
BP - Results broadly as expected

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BP Plc Ordinary US$0.25

Sell: 502.00 | Buy: 502.10 | Change 4.75 (0.96%)
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Underlying operating profits rose 2.5% in the first quarter to $4.8bn.

The results slightly ahead of expectations, with a strong result from Downstream offset by lower prices and increased operating costs in the Upstream division. BP was also hit by increased finance costs following the acquisition of assets from BHP.

The quarterly dividend of 10.25 cents is 2.5% higher than last year.

The shares were broadly flat in early trading.

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Our view

New oil fields are coming online, with the extra production supporting revenues in Upstream. Meanwhile the Downstream business, which has been BP's rock throughout much of the oil downturn, continues to deliver excellent results. In short BP looks in pretty good health.

With profits 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. In recent years BP's been able to breakeven on a cash basis, including paying a sizeable dividend, at an oil price of about $50 a barrel.

A not insignificant portion of BP's sizeable cash flows are still being soaked up by Deepwater Horizon payments, $3.2bn in 2018, but those numbers are finally starting to shrink. With the oil price currently north of $70 a barrel, BP's still got firepower to play with.

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 5.7%.

The group's also been 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, and BP is relying on disposals to help bring debt back into line. The group's targeting $10bn of sales in 2019 and 2020, or around $1.25bn a quarter. Clearly it's early days in that programme, but it's an ambitious target and shouldn't be taken for granted,

Nonetheless as things stand BP looks in good shape. The combination of organic growth and disposals means there's scope for substantial returns to shareholders, once the balance sheet has been put right that is.

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First Quarter Results

Underlying operating profits in the Upstream business fell 7.3% year-on-year to $2.9bn. That reflect a 4.9% fall in the average oil & gas price the group received to $39.37, more than offsetting a 2% increase in production.

The Downstream refining and trading business saw underlying profits rise 3% to $1.8bn, boosted by a good result from the Petrochemicals business.

BP's stake in Rosneft contributed $567m to total profits, up 129.6%, as favourable currency movements offset weaker oil prices.

BP's other businesses and corporate centre resulted in an overall underlying operating loss of $418m.

Operating cash flows during the quarter reached $5.3bn, up 45.3% year-on-year. That includes a $0.6bn payment relating to the Gulf of Mexico oil spill. Capital expenditure in the quarter hit $5.6bn, with increases in both organic and inorganic expenditure.

BP finished the quarter with net debts of $45.1bn, compared to $39.3bn a year ago. That increase was largely driven by the acquisition of assets from BHP. As a result gearing rose to 30.4%. That's above the group's target of 20-30%.

The group expects production to be broadly flat in the second quarter, with a ramp up in major projects during the second quarter offset by maintenance activities in certain high margin regions.

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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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