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BP - prices hit profits, but results still better than expected

Nicholas Hyett, Equity Analyst | 4 February 2020 | A A A
BP - prices hit profits, but results still better than expected

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BP Plc Ordinary US$0.25

Sell: 290.50 | Buy: 290.60 | Change -0.90 (-0.31%)
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Fourth quarter underlying profits fell 26.2% to $2.6bn. That reflects the fall in average oil & gas prices, partially offset by increased production and lower costs.

The group announced a quarterly dividend of 10.5 cents per share, up 2.4% year-on-year, and completed its $1.5bn share buyback programme during the period.

The shares rose 3.5% 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, $2.4bn 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 titbit 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 7.0%.

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 over the coming year, but there's always the possibility oil prices upset plans.

Longer term increasing consumer and investor hostility towards hydrocarbon fuels is a challenge, with falling demand potentially undermining oil prices. While we think oil & gas will continue to play an important role in the global energy mix for years to come, probably at the expense of coal, it's good to see the group investing in renewable energy sources now. Lightsource is a particular success, but BP also owns wind and biofuel asset that should provide some insulation against future energy shifts.

In the near term we feel there could be scope for substantial returns to shareholders if oil prices behave. That's outside BP's control though and there are no guarantees.

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Fourth Quarter Results

Total hydrocarbon production rose 2.7% to 2.7m barrels of oil equivalent per day (boepd). However, average prices fell 15% with an average oil price of $55.90 per barrel. As a result the Upstream division reported an underlying profit before interest and tax of $2.7bn, down 31.1%.

Downstream underlying profits before interest and tax fell 33.7% to $1.4bn. At $1.1bn the fuels business accounted for the vast majority of profits, but struggled against an unfavourable industry backdrop. The fuel retail business continues to perform well following the introduction of the convenience model, with Mexico a particular success.

BP's stake in Rosneft accounted for $412m of underlying profit before interest and tax - slightly below the same period last year.

Free cash flow during the quarter came in at $3.5bn, with capital expenditure significantly lower year-on-year. Together with proceeds from disposals that underpinned a $1.1bn fall in net debt, with gearing (a key measure of overall indebtedness) falling from 31.7% to 31.1%).

2020 production is expected to be below 2019, driven by lower gas production and ongoing disposals.

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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 for more information.