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Stock Watch

BP share price gets a lift from dividend increase and buyback

BP share price - BP petrol station forecourt

You would think that with oil prices up near three-year highs that BP’s share price would have risen along with it, and while it is up in the year, it’s still below the level it was at its Q1 update, even with today’s positive reaction to the company’s Q2 results.

Today’s Q2 update is certainly welcome news for shareholders, with the company reporting $2.8bn underlying replacement cost profit, compared to a $6.7bn loss a year ago. It also helped to boost half-year replacement cost profit to $5.4bn, thus building on the underlying replacement cost profit of $2.6bn in Q1, and posting its best performance since 2019.

Dividend and buyback announcment helps BP share price  

The company also increased its dividend to 5.46c a share, as well as announcing a $1.4bn share buyback from its H1 surplus cash flow. BP went on to say that, with oil prices at $60, there was scope to deliver buybacks of $1bn a quarter, and to have capacity to increase the dividend by 4%.

Cashflow was lower than in Q1, though this was largely expected due to the $1.2bn Gulf of Mexico oil spill payment which was flagged in Q1, down by $700m to $5.4bn.

Net debt was also lower, down to $32.7bn from $33.3bn.

With Royal Dutch Shell raising the bar last week with an increase in the dividend and resuming its buyback program, BP's Q2 and first-half update was always likely to be judged against a high standard today, and it appears to have delivered, with BP's share price up this morning.

A shift in focus to renewables 

There is little doubt that the rise in the oil price has helped BP this quarter, along with the rest of its peers. However, if the company wants to meet CEO Bernard Looney’s plans for a 40% reduction in oil and gas production by 2030, then it will need to invest a lot more in renewables to be able to do that. While shareholders will no doubt be pleased about today’s extra windfall, you have to question whether this is the best long-term use of the company’s surplus cash flow. If BP is able to deliver on its pledges, then by 2025, they will have spent more on buybacks than on renewables.

The transition towards green energy will continue to be expensive and, while BP can point to bidding for wind leases, investment in solar, as well as infrastructure like EV charging stations, the real challenges lie in building grid capacity, and there appears to be little or no investment in that from any of the oil majors, or anyone else for that matter.

You can have as many charging stations as you like but if the grid can’t cope then the economy is going to find itself in a world of pain.

There has been progress with the company delivering on a number of projects, including a renewable pipeline. Lightsource has continued its expansion in Portugal, Spain, Greece and Australia, while also saying it intends to bid for offshore wind leases in Scotland and Norway.  

Reducing oil and gas production could be a challenge 

The jury remains out on whether the plans for a 40% reduction in oil and gas production is achievable without hammering margins, given that most of BP’s profit in the first half came from its oil production and operations – business to the tune of $3.8bn. Gas and low carbon energy was next with $3.5bn. A succesful renewables strategy may be essential to ensuring the long-term bouyancy of the BP share price.

Having invested in wind power leases in the Irish Sea, it is clear what the direction of travel is, while Lightsource is also delivering on its projects.

For now, the performance of BP's share price would appear to suggest that the jury remains out on whether BP will be able to pull off its ambitious plans, though an oil price up at $70 a barrel and a pickup in demand for gasoline and distillates will no doubt help as far as the rest of the year is concerned.

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