The turnaround in BP’s fortunes since 2010 has been a very long road and CEO Bob Dudley has managed to navigate this tricky road with significant assuredness, so the news that the shares have hit three year highs this morning is good news with the Deepwater Horizon tragedy firmly in the rear view mirror, having paid out over $63bn in compensation over the past few years.
The sharp decline in the oil price certainly hasn’t helped but the sales of assets and the slim lining of the business did give the company a head start when the oil price slide began.
Part of the cost of the turnaround has been a rise in net debt and this has continued to edge higher, and a year ago there was some concern that this might start to become a problem if profits and margins didn’t start to improve. Towards the end of last year BP management raised the price it needed oil prices to be to $60 a barrel to break even, after reporting an annual loss of $542m in its oil and gas upstream division at the end of its previous fiscal year.
Now that we’ve seen Brent crude prices move above $60 a barrel and with the output freeze agreed by OPEC set to be extended into 2018, the outlook is much improved from where we were at the end of July, particularly since BP is set to get its breakeven price down towards $49 a barrel.
Today’s Q3 results have reinforced the positive picture seen in the summer with profits coming in at $1.9bn, well above the $684m seen in the previous quarter. More importantly operating cash flow has increased from a year ago with the year to date number increasing to $13bn from $8.3bn, the year previously.
Total revenue also came in above expectations at $60.8bn, a big jump from the same period a year ago, while the company kept its quarterly dividend unchanged at $0.10c a share, which equates to a yield of around 6%, against a dividend cover that remains well below the level that is needed to be sustainable. The norm for a decent dividend cover is 1, while BP’s comes in at 0.
While today’s results have been greeted with an overwhelming sense of celebration by the market with the company also announcing a share buyback of shares which were issued in lieu of dividends, which has seen the shares jump higher on the open, one can’t help thinking that investors are being a little bit too short term when it comes to BP’s fortunes, as the shares head back towards levels last seen in June 2014.
Net debt still remains quite high, currently at $39.7bn which is up from $32.4bn a year ago, giving it a gearing of 28.4%.
Given the long road to recovery it does seem rather short sighted of management to not try and look at making a more sizeable reduction in net debt, particularly since the company is doing so well in improving revenues, cost cutting, and divestments helped by a breakeven oil price that is set to come down further.
It’s been a while since the company has been able to start getting close to covering the dividend, and while interest rates remain low this may be sustainable in the short term, however management need to understand that fixing the roof while the sun is shining might also be a good idea, particularly if oil prices start to slide back.
As we well know from the last few years, the next crisis is never too far away.
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