BP Plc (BP.) Ordinary US$0.25
HL comment (3 August 2021)
BP reported revenues in the second quarter of $36.5bn, up 71.5% on a year ago, as average realised oil & gas prices more than doubled offsetting an 11.3% decline in production.
The group reported underlying profits of $2.4bn, up from a $17.7bn loss this time last year.
The board announced a dividend of 5.46 cents per share, up from 5.25 a year ago, with a further $1.4bn of share buybacks announced.
BP shares rose 3.4% in early trading.
The dramatic increase in oil prices over the last year is masking pretty much everything else in BP's half year results.
Revenues are up, and the huge write downs in reserve valuations seen last year have not been repeated. As a result profits are up and, crucially, positive free cash flow and billions of dollars in disposals have got the balance sheet back into something like good health - cutting $8.1bn off net debt in the last 12 months and getting gearing (the industry's preferred measure of leverage) back under 30%.
The group plans to sell billions more in assets over the next four years or so, funding a share buyback scheme that is designed to keep the dividend affordable. Reducing the number of shares in issue allows the group to maintain or grow the dividend per share while holding total dividend expense steady at $1.1bn a quarter or even reducing it.
But selling assets to pay down debt and buy back shares isn't a long-term strategy. Eventually the business would slowly devour itself until there's nothing left. Instead the group needs to generate significant positive free cash flow from the core business.
Legacy oil & gas assets seem to be doing just that for now, helped by the group's decision to trim capital expenditure. But oil & gas are capital hungry businesses, if new oil wells aren't brought online, eventually the group's fields will run dry.
That make BP's decision to concentrate future capital expenditure in lower carbon assets a brave one. In the first quarter of this year the group spent $1.9bn on gas and low carbon projects and just $1.3bn on oil production and operations. It's testament to the changing nature of energy markets, that a company formerly called British Petroleum is slowly selling off and running down it's oil assets. By 2030 the group expects to be spending $5bn a year on low carbon energy projects, up from just $500m in 2020.
The new strategy calls for a twenty-fold 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.
It's an admirable goal and, depending on the speed of the transition, may prove an inspired decision. However, we worry that BP may be selling 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 will be expensive and in the short term will probably be a bit of a money pit. That could make the next few years tough for BP.
BP key facts
- Price/Earnings ratio: 7.7
- 10 year average Price/Earnings ratio: 12.4
- Prospective dividend yield (next 12 months): 5.3%
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.
Half Year Results
BP's gas & low carbon energy division reported underlying operating profits in the second quarter of $1.2bn, against a $814m loss a year ago. That reflects lower exploration cost write offs, higher oil prices and a strong performance in gas marketing and trading.
Gas production increased moderately, as the ramp up of new projects offset some assets sales. The renewables pipeline grew by 7GW in the quarter to 21 GW - reflecting major solar projects in the US and Wind projects in the UK.
Oil Production & Operations reported underlying operating profits of $2.2bn, up from a $7.7bn loss a year ago - boosted by higher prices and lower exploration write offs. Production fell 24.8%, following disposals in Alaska and in BPX Energy.
Customers & Products, which includes BPs downstream and retailing businesses, reported underlying operating profits of $827m, down from $1.4bn last year when oil price volatility resulted in an exceptional trading performance. The group continued to see strong progress in its convenience, mobility and Castrol businesses.
BP's Rosneft stake contributed underlying operating profits of $689m, up from a $61m loss a year ago, driven by higher oil prices.
BP reported free cash in the quarter of $3.0bn, up from $719m in the same quarter last year. That reflects in part lower capital expenditure, which came in at $2.4bn compared to $3.0bn in 2020.
Net debt finished the quarter at $32.7bn, down from $40.9bn a year ago and $33.3bn three months ago. That's a gearing ratio of 26%.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.
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