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BP - Huge cashflows drive investment and shareholder payouts

BP's underlying net profit for the fourth quarter of 2022 totalled $4.8bn.

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BP's underlying net profit for the fourth quarter of 2022 totalled $4.8bn. This was over 40% below the exceptional performance in the previous quarter, but was still enough to allow BP to score a record result for the year, with profits more than doubling to $27.7bn. This reflects a 48% average increase in the price of oil and gas achieved for BP's oil production and operations.

Free cash flow in 2022 was $28.9bn, up from $12.7bn. Net debt fell by 30% year-on-year to $21.4bn. BP announced a dividend of 6.61 cents and intends to buy back a further $2.75bn of its own shares before the release of its first quarter results.

In the first quarter of 2023, BP expects the oil price to remain supported by improving Chinese demand, and the uncertainty surrounding Russian exports. The gas price is expected to depend on weather in the Northern Hemisphere and also the pace of Chinese demand recovery. Refining margins are expected to remain high, with lower levels of downtime than seen recently. Oil & gas production is expected to be broadly flat.

BP has also released a strategy update today, confirming up to $16bn of investment out to 2030, split evenly across projects in the energy transition, and oil & gas.

The shares were up 4.0% in early trading.

View the latest BP share price and how to deal

Our View

Buoyant oil prices are feeding though to massive cash flows, more than offsetting BP's capital investment. It's also allowed some substantial shareholder returns and given the group space to pay down debt to levels not seen in nearly a decade.

Indebtedness, as measured by gearing, has been heading in the right direction. Surplus cash is still outpacing planned buybacks too, which supports the shareholder returns programme. Buybacks have also helped keep the dividend affordable.

We should note that continuing growth in dividends and buybacks depend on the oil price remaining elevated. The oil price has been on a downward trend since the summer, and with the global economy set to slow in 2023, the risk of further volatility is very real. With ambitious investment plans there are other demands on cash to be mindful of. No dividends are guaranteed.

Legacy oil & gas assets are what's been keeping the cash flowing for now. That's being aided by robust production volumes this year, despite the sale of Russian joint ventures. M&A in this area's focused on improving the quality of the group's oil & gas assets to expand margins, while production slowly drops over the next decade.

There is growing pressure globally for more meaningful windfall taxes on the currently inflated profits of oil and gas profits. This is a risk to BP's ability to sustain such high cash flows, and the recently introduced UK energy profits levy on its North Sea operations saw the underlying tax rate rise from 32% to 40% in the last quarter of 2022.

Looking further ahead, BP has big plans to increase exposure to renewable and lower carbon energy sources but it's proving harder than expected to wean off the black stuff. The carbon emission reduction target from 2019 to 2030, for its oil and gas production has been reduced to 20 to 30%. The prior target was 35 to 40%.

This is unlikely to sit well with responsible investors and also poses a risk to BP's longer term valuation if mainstream investors can't be convinced of its ESG credentials.

Despite an impressive financial performance, BP's valuation remains some way below the long-term average. In our opinion this reflects investor concern over the long-term outlook for the oil & gas industry. Whilst BP is making a considerable effort to participate in the energy transition, only time will tell if this enough to keep convince investors that it can become greener without sacrificing investment returns.

Environmental, social and governance (ESG) risk

Environmental concerns are the primary driver of ESG risk for oil and gas producers, with carbon emissions and waste disposal being the main issues. Health and safety, community relations and ethical governance are also contributors to ESG risk.

According to data from Sustainalytics, BP's ESG risk is below average compared to its industry peers.

ESG data sourced from Sustainalytics

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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.

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
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 7th February 2023