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BP - Solid half, debt the focus from here

Nicholas Hyett | 30 July 2019 | A A A
BP - Solid half, debt the focus from here

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BP Plc Ordinary US$0.25

Sell: 512.10 | Buy: 512.20 | Change 1.40 (0.27%)
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BP reported an underlying operating profit of $5.2bn in the second quarter, 4.5% below the same quarter last year. That was down to weakness in Upstream and Rosneft, on lower oil prices and the poor refining margins. However, results were still some way ahead of what analysts had expected.

The company announced an interim dividend of 10.25 cents per share, a 2.5% increase on last year.

The shares rose 3.3% 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, while good cost control means extra sales are finding their way through to profits.

With profits now firmly back in positive territory, the focus has turned to cash, the balance sheet and shareholder returns.

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 6.2%.

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 does mean the balance sheet's still stretched and net debt is higher than the group, and we, would like. The combination of disposals and organic cash flow is expected to rectify the situation by the end of next year, but there's always the possibility oil prices upset plans. However, in our opinion there's scope for substantial returns to shareholders going forwards if oil prices behave.

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Second Quarter Results

The Upstream division, which includes BP's oil & gas exploration and production businesses, saw underlying operating profits fall 2.7% to $3.4bn. Production in the quarter was 6.5% higher than last year, at 2.6m barrels of oil equivalent per day (boepd), or 0.7% higher on an underlying basis. The average price received across both oil and gas was $40.64 per barrel of oil equivalent, 6.3% lower than in the second quarter of 2018.

Upstream production is expected to be lower next quarter, reflecting normal maintenance and seasonality, as well as some hurricane disruption in the Gulf of Mexico.

Downstream, which includes refining and sales of oil products, saw underlying operating profits fall 6.2% to $1.4bn. That was largely due to weakness in the Fuels business, where profits were 8.8% lower than this time last year due to lower refining margins, partially offset by an improvement in Petrochemicals.

BP's stake in Rosneft contributed underlying operating profits of $638m, 16.7% lower than the same period last year. That reflects lower oil prices, duties and foreign exchange.

Other businesses and the corporate centre generated a loss of $290m during the period, down from a $477m loss last year. The division includes BP's Alternative Energy business and BP Ventures.

The group reported free cash flow of $708m, after capital expenditure of $3.7bn. That was insufficient to cover the dividend and as a result the group finished the half with net debt of $46.5bn and a gearing ratio of 31% (compared to $38.7bn and 27.5% a year ago). However, the combination of free cash flow and disposals is expected to return the group to a gearing ratio in the middle of the 20-30% range in 2020.

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