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BP - Dividend raised and buybacks increased

Full year revenue rose 50.5% to $164.2m, reflecting an increase across all segments with gas and low carbon energy nearly doubling.

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Full year revenue rose 50.5% to $164.2m, reflecting an increase across all segments with gas and low carbon energy nearly doubling. Underlying profit was $12.8bn, up from a $5.7bn loss last year, driven by higher oil and gas prices, improved refining margins.

The group announced a fourth quarter dividend worth 5.46 cents, bringing the total for the year to 21.420 cents. The group also announced a further $1.5bn share buyback.

Assuming an oil price of $60 per barrel, the group plans to increase its dividend by 4% and deliver around $4bn in buybacks each year to 2025.

The shares rose 1.6% following the announcement.

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Our View

BP has continued to benefit from higher oil prices. While derivative valuations have muddied the headline numbers, look through that and the price spike has fuelled a rapid recovery in revenues.

That's feeding though to massive cash flows, more than offsetting capital investment. It's also allowed some substantial shareholder returns and given the group space to pay down debt.

Indebtedness, as measured by gearing, came down slightly from the third quarter, which was a welcome development. Surplus cash outpaced buybacks, which supports the shareholder returns programme. Buybacks also help keep the dividend affordable. Reducing the number of shares in issue allows the group to maintain or grow the dividend per share. All while holding total dividend expense steady. We should note that current plans rest on the oil price remaining elevated, which BP has no control over. No dividend is ever guaranteed.

Debt reduction and buybacks are also being heavily supported by asset sales. And that's not a long-term strategy. Eventually, the business would slowly devour itself. Instead, the group needs to generate significant and sustainable positive free cash flow by itself.

Legacy oil & gas assets seem to be doing just that for now, helped by the group's decision to trim capital expenditure. But oil & gas companies are capital hungry businesses, if new oil wells aren't brought online, eventually the group's fields will run dry.

So, focussing capital expenditure on lower carbon assets is brave. The group spent $4.7bn on gas and low carbon projects last year, just a hair below what was spent on oil production and operations. By 2030 the group expects to be spending $5bn a year on low carbon energy projects, up from just $1.5bn in 2021.

The new strategy calls for a twenty-fold increase in renewable generating capacity, big increases in biofuel and hydrogen output, increased focus on its petrol station convenience offering and continued investment in electric vehicle charging. Meanwhile the carbon intensity of the group's remaining oil & gas assets will fall.

It's an admirable goal and based on the group's decision to ramp up its targets, it's humming along faster than expected. This more aggressive approach to the transition could prove to be an inspiring one. However, we worry that BP may be swapping high returning, high quality oil & gas fields for low returning renewables with an unproven track record. Neither BP nor the global energy mix will be free of oil & gas products for years to come, and investing in renewables could be a bit of a money pit in the short term. That could make for a difficult few years if oil prices slide.

BP key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Full Year Results

Underlying profit before interest and tax was $7.5bn in the Gas & Low Carbon Energy segment, up from $689m last year as major project start-ups boosted production by 9%. The group made progress in renewables, with capacity increasing from 1.5GW to 1.9GW.

Underlying profits in Oil Production & Operations rose to $10.3bn from a $5.9bn loss, reflecting higher liquid and gas prices and lower exploration costs. This offset production declines in liquids, natural gas and hydrocarbons due to reduced capital investment.

Customers & Products reported a 5.3% increase in underlying profits to $3.3bn. This reflected flat results from Customers as higher volumes were offset by rising commodity costs, wages and marketing spend. Products saw refining margins improve despite increased maintenance and rising energy costs.

Higher oil prices and foreign exchange tailwinds helped Rosneft underlying profit rise to $2.7bn from $56m. Other Businesses & Corporate posted underlying profits of $1.4bn, up from $882m.

The group completed $7.6bn of asset sales and expects to receive a further $2-3bn in 2022.

BP reduced net debt by $8.3bn, bringing the total to $30.6bn at the end of the year. This contributed to a significant decrease in gearing ,which measures the percentage of operations funded by debt, from 31.3% to 25.3%. Free cash flow, excluding the impact of disposals and acquisitions, rose to $12.7bn from an outflow of $144m.

BP is planning to up the proportion of capital expenditure aimed at transitioning toward low carbon energy to 40% by 2025, increasing to 50% in 2030. It expects this part of the business to generate profits between $9 and $10bn by 2030.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

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Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 8th February 2022