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BP - underlying profits squeezed but buybacks continue

BP's first-quarter revenues were up from $49.3bn to $56.2bn, with the rise largely reflecting an exceptional performance...

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BP's first-quarter revenues were up from $49.3bn to $56.2bn, with the rise largely reflecting an exceptional performance from gas marketing and trading.

Underlying replacement cost profit, BP's headline measure of profit from operations, was down 19.4% to $5.0bn. The gas marketing and trading performance also fed through to profits, but was not enough to offset lower oil and gas sales.

Free cash flow fell from $5.3bn to $4.0bn, and net debt came in $6.2bn lower at $21.2bn.

BP expects second quarter oil and gas prices to remain high, but sees lower refining margins across the industry.

$2.2bn of share buybacks were completed in the quarter, with a further $1.75bn planned before the release of second quarter results. A dividend of 6.61 cents per share was declared.

The shares fell 4.4% following the announcement.

View the latest BP share price and how to deal

Our View

A steady decline in oil prices since the heights of mid-2022 are starting to hold back BP's cash flows. Even so, consensus forecasts suggest that BP's capital investment is 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's should have room to grow dividends by around 4% this year. But of course, this can't be guaranteed.

Lower levels of cash generation could mean a pause in the impressive reduction in debt levels seen over recent years. But with net debt less than 0.5x forecasted cash profit we're not too concerned.

BP thinks production restrictions by the world's leading oil producing nations, combined with strengthening demand from China will shore up commodity prices in the short term. However, we think that continuing economic headwinds represent a significant downside risk.

Oil & gas assets are what's been keeping the cash flowing for now and underlying production is set to increase by 2025. But 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. Its carbon emission reduction target from 2019 to 2030 for oil and gas production has been reduced to 20-30%. The prior target was 35-40%.

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 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

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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: 2nd May 2023