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BP - higher prices fuel fresh buyback

Total second quarter revenue was 85% higher than last year to $69.5bn, driven by growth across all segments.

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Total second quarter revenue was 85% higher than last year to $69.5bn, driven by growth across all segments. That includes the benefit of higher energy prices. Underlying profit rose from $2.8bn to $8.5bn.

The group announce a dividend of 6.006 cents per share, 10% higher than last year. During the quarter, $2.3bn of share buybacks were executed and the $2.5bn buyback programme is now complete. A new, $3.5bn buyback is expected to complete prior to the announcement of third quarter results.

The shares rose 3.7% following the announcement.

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 capital investment. It's also allowed some substantial shareholder returns and given the group space to pay down debt.

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 also help keep the dividend affordable. We should note that current buyback and dividend plans rest on the oil price remaining elevated, which BP has no control over. No dividend is ever guaranteed.

Legacy oil & gas assets are 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 focussed on improving the quality of the group's oil & gas assets to expand margins, while production slowly drops over the next decade.

Looking further ahead, BP has big plans to increase exposure to renewable and lower carbon energy sources. Though keeping an oil & gas giant running doesn't come cheap, let alone expanding into new areas. Capital expenditures expected in the region of $14-$15bn this year, with similar levels through to 2025 - around a third of that set aside for this endeavour.

The new strategy calls for huge 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.

Recent investments in wind farms, electric vehicle charging stations and hydrogen projects are all aimed at capturing a slice of the energy transition pie.

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.

Second Quarter Results

Underlying operating profit for gas & low carbon energy rose from $1.2bn last year, to $3.1bn. That reflected both higher prices and increased production. The renewables pipeline rose from 21.2GW last year, to 25.8GW.

Oil production & operations saw underlying operating profit rise from $2.2bn last year, to $5.9bn. Again, that was driven by higher prices and a 2.3% increase in production.

Customers & products posted underlying operating profit of $4.0bn, up from $827m last year. All of the increase was attributed to the performance of products, specifically refining and trading which benefited from higher refining margins and 'exceptional' oil trading.

On 11 July 2022 the UK government introduced legislation which imposes a new levy on the profits of UK oil and gas companies. This will increase the headline rate of tax from 40% to 65% on profits from bp's North Sea business.

The group generated free cash flow, including lease liabilities, of $7.6bn. That helped the group reduce net debt from $27.5bn at the start of the period to $22.8bn.

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: 2nd August 2022