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BP - dividend upped despite profit miss

BP has reported third quarter revenue of $53.3m down from $55.0m.

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BP has reported third quarter revenue of $53.3m down from $55.0m.

Underlying operating profit fell from $8.2bn to $3.3bn. This was an improvement over the previous quarter but fell short of analyst expectations of $4bn, reflecting weak gas marketing and trading.

Free cash flow grew slightly to $5.3bn reflecting strong operating cash flows. Net debt reduced by $1.3bn from the beginning of the quarter.

Fourth quarter upstream production is expected to be broadly similar to the quarter just reported, with oil prices to be supported by OPEC+ production restrictions and the continued demand rebound. Refining margins are expected to fall significantly.

The dividend increased by 21% to $7.27 per share. BP repurchased $2bn of shares over the quarter and has announced a further $1.5bn buyback today.

The shares fell 4.8% following the announcement.

View the latest BP share price and how to deal

Our view

Oil & gas prices have been swinging wildly this year and therefore so have BP's profits. The outlook for prices has strengthened recently, but BP is still facing some challenges. The recovery in gas prices has been far weaker than in oil and that's hit BP's bottom line. Meanwhile lower margins across the refining industry coupled with downtime at BP's refineries will be further headwinds this year.

But BP is 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. BP's capital expenditure budget stands at $16bn for the current year and is likely to stay at a similar level till at least 2030.

Despite this year's ups and downs, 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 the first nine months 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.

BP is making some meaningful headway in transition technologies such as biogas, electric vehicle charging and renewables. But the sudden departure of the CEO earlier in the year left many questioning the group's green ambitions. Whilst investment in low carbon energy is expected to grow, hydrocarbons remain the focus of the company's spending plans for the foreseeable future. And the recent increase in profit targets for the end of the decade have been underpinned by new fossil fuel-based projects.

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. There's little chance of further assurance until clarity emerges around the appointment of a full time CEO.

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
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: 31st October 2023