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BP - Oil price weighs on profits

Nicholas Hyett | 29 October 2019 | A A A
BP - Oil price weighs on profits

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BP Plc Ordinary US$0.25

Sell: 312.75 | Buy: 313.00 | Change 5.20 (1.69%)
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BP reported an underlying profit before tax of $4.5bn in the third quarter, 32.5% behind the same period last year. That reflects lower production and lower oil & gas prices in Upstream and reduced refining margins in Downstream.

The group announced a dividend of 10.25 cents during the quarter, in-line with last year.

The shares were broadly flat 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 6.3%.

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 next year, but there's always the possibility oil prices upset plans. Nonetheless we feel there's scope for substantial returns to shareholders if oil prices behave going forwards.

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Third Quarter Results

Underlying profits fell 46.5%, to $2.1bn, in the Upstream division, which includes BP's oil & gas production assets. That reflects a 2.5% decline in underlying production due to increased maintenance activity and a 23.1% decline in the average price received for the group's oil & gas products.

Downstream saw underlying profits fall 10.8% year-on-year to $1.9bn. The fall reflects lower refining margins in Fuels and lower margins in Petrochemicals, offsetting a slight increase in total refinery throughputs and petrochemical production.

Underlying profits fell 8.0% at Rosneft, to $802m. That reflects lower oil & gas prices, with production broadly flat year-on-year. The corporate centre accounted for a $322m loss during the quarter.

BP agreed to sell its Alaskan business to Hilcorp Energy during the quarter, taking total disposals announced so far this year to $7.2bn. BP expects to reach $10bn in disposals by the end of 2019. The group incurred $2.9bn of non-underlying impairment charges from disposals during the quarter, as assets were sold for less than the value at which they were held on BP's balance sheet.

Higher impairment charges meant gearing, which is measured as debt as a proportion of total equity, increased to 31.7% compared to 27.1% year ago. Operating cash flow, excluding $0.4bn of payment relating to the Gulf of Mexico oil spill, was $6.5bn, with sufficient free cash flow to cover the dividend.

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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.