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BP - better than expected despite a drop in profits

BP reported fourth-quarter total revenue of $52.6bn, down from $70.4bn in the prior year.

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BP reported fourth-quarter total revenue of $52.6bn, down from $70.4bn in the prior year.

Underlying net profit was better than expected, down 38% to $3.0 billion. That reflected lower prices and the impact of significantly lower refining margins, partially offset by strong gas marketing and trading.

BP generated a free cash flow of $5.2bn compared to $9.9bn the prior year, due to lower operating cash flows. Net debt was reduced by $1.4bn to $20.9bn at the end of the fourth quarter.

The fourth quarter dividend has been increased 10% to 7.27 cents. BP intends to complete a $1.75bn buyback over the first quarter and plans to return $3.5bn over the first half of 2024.

The shares rose 6.7% in early trading.

View the latest BP share price and how to deal

Our view

The recovery seen in global oil prices in the second half of last year has proved to be short-lived amidst growing concerns of oversupply in the market. Meanwhile lower margins across the refining industry coupled with downtime at BP's refineries have been further headwinds.

Despite that, shares got a pop after fourth quarter performance was better than expected. BP remains in a strong financial position and continues to generate impressive cash flows. That's just as well because both BP's traditional oil & gas extraction business, and emerging focus on cleaner forms of energy, are highly capital intensive. Capital expenditure topped $16bn last year and is likely to stay at a similar level till at least 2030.

Despite the weakness in commodity prices, consensus forecasts suggest that BP's capital investment plans are well covered, leaving ample room to increase dividends modestly and continue buying back shares. Assuming an oil price of $60 per barrel, some way below the current price, BP should have room to continue growing the dividend, and purchase around $4bn of shares each year. Of course, no shareholder returns are guaranteed.

Oil &gas assets remain the key drivers of cash flow for now and underlying production is set to increase by 2025. But there is growing pressure globally for more meaningful taxes on oil and gas profits. This is a risk to BP's ability to sustain its high cash flows, and the recently introduced UK energy profits levy on its North Sea operations saw the underlying tax rate rise from 33% to 39% over 2023.

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. However, it's also lagging its peers and that could present an opportunity if the new CEO can provide investors with assurance that BP can prosper over the long term. Although of course there are no guarantees.

The Group has been making some meaningful headway in transition technologies such as biogas, electric vehicle charging and renewables. Whilst investment in low carbon energy is expected to grow, hydrocarbons remain the focus of the company's spending plans for the foreseeable future. The early signs are that Murray Auchincloss won't make too many changes to the direction of travel but we expect to get a clearer view of his vision for the future in due course.

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 overall management of material ESG issues is strong. It appears to have strong oversight over its key ESG issue. Notably, the company aims to reach net zero emissions across its entire operations (scopes 1 and 2) and upstream operations (scope 3) on an absolute basis by 2050. But nearer-term reduction targets for scope 3 emissions have recently been lowered. Moreover, BP has committed to reducing the carbon intensity of its products to net zero by 2050. However, controversies relating to environmental breaches continue to have a moderate impact on BP's overall performance.

ESG data sourced from Sustainalytics

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 6th February 2024