While BP’s [BP] stock rallied 4% after its strong third-quarter earnings release, it has mainly been on an eight-month decline due to this year’s oil plunge.
The multinational oil and gas company had benefited from bullish oil prices at the beginning of the year when its stock reached a high of $47.79 in May, as the price of Brent Crude climbed to nearly $80 a barrel. However, it has since fallen 17%.
Oil prices received a much-needed boost from OPEC after the group of oil producing nations (not including the US) made a deal to cut production by 1.2m barrels a day on 7 December, which saw BP’s stock shoot up by 2% with bullish sentiment likely to follow.
BP share price performance, NASDAQ interactive chart, as at 14 December 2018
A slew of strong earnings
BP beat analysts’ expectations as well as its own in its third-quarter earnings in October with an underlying profit of $3.8bn, its highest quarterly result in more than five years.
As the eighth-largest company in the world by revenue, BP has had a strong slew of earnings this year with profits soaring 71% in the first three months of 2018. Production profit was $2.6bn in the quarter – the firm’s highest in five years – and $2.7bn in Q2.
“Operations are running well across BP and we’re bringing new, higher-margin barrels into production faster through efficient project execution,” Bob Dudley, group chief executive at BP, said.
The firm’s next earnings report will be announced on 5 February 2019. Analysts expect a 26% increase in revenue year-over-year.
|Dividend % change, Q3 YoY||+2.5%|
|PE Ratio (TTM)||15.04|
BP stock vitals, Yahoo finance, as at 14 December 2018
Major projects expected to come to fruition
During the downturn in the oil market between 2014 and 2017, BP’s earnings collapsed along with its peers. However, it did well to realign its portfolio of assets to remain competitive in the volatile oil and gas industry.
The launch of seven major projects in 2017, a historical record for the company, was built on this year. Major initiatives such as BP’s ‘Thunder Horse’ northwest expansion in the Gulf of Mexico and ‘Clair Ridge’, the second phase development of the Clair oilfield just off the Shetland Islands, is expected to restore the company’s output to four million barrels a day. This is the same amount BP was producing before the Gulf of Mexico Deepwater Horizon spill in April 2010. The event caused the company major controversy and its share price to collapse by as much 52% over the two months following, after then US President Barrack Obama condemned BP and enforced it to pay billions in compensation.
“BP highlighted its ability to realise significant capital efficiencies through technology, which would act as a source of upside for cash return as BP remains committed to its $15-17 billion capex guidance to 2021,” Christyan Malek, analyst at JP Morgan, wrote in a note.
Malek also noted the company’s ability to manage its capital expenditure and keep its base cost for oil production as a key growth driver.
“BP highlighted its ability to realise significant capital efficiencies through technology, which would act as a source of upside for cash return as BP remains committed to its $15-17 billion capex guidance to 2021,” - Christyan Malek, analyst at JP Morgan
In its biggest deal for nearly 20 years, BP announced that it would buy in cash US miner BHP Billiton for $10.5bn in July to expand its footprint in some of the nation’s most productive oil basins, specifically the oil-rich Permian basin in west Texas.
Given the US is now the biggest oil producer in the world, the deal will increase its onshore oil and gas resources by 57%, which is expected to create significant value for BP.
Most appealing dividend in FTSE 100
A major factor that has kept investors interested in its stock is the company’s attractive dividend, which was 10.25 cents a share for the third quarter, a rise of 2.5% from last year.
Since its dividend hike in July, management has repeatedly proved that it will keep the generous 6.1% yield even during serious downturns.
Another positive sign is that the company may finally be moving toward the last series of penalty payments from the Deepwater Horizon rig disaster, as it becomes a more manageable figure.
BP dividend yield since hike in July
BP paid $0.5bn on a post-tax basis in the third quarter for the scandal and is expected to pay $1bn in 2020. In total, it has paid off more than $65bn in penalties and clean up since 2010.
Although Brexit uncertainty and general negative sentiment towards European shares is likely to weigh down this FTSE stock, some analysts believe it has the potential to outperform its industry peers in the long run.
Overall, BP has an extremely shareholder-friendly character and strong balance sheet, with plenty of growth opportunities from its many projects, although whether it can shake its oil spill correlation with its renewable energy efforts remains a mighty task.