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BP share price underwhelms despite another buyback

BP share price: Drivers fill up on petrol at a BP service station before hitting the gas

Judging by the moves in BP’s share price so far this year, investors appear to have little confidence that the business will be able to meet CEO Bernard Looney’s plans for a 40% reduction in oil and gas production by 2030.  

BP share price falls 3% in early trading after Q3 results

BP's share price fell 3% in early trading this morning, despite the company's strong Q3 results, partly because questions remain about the company's proposed pivot away from fossil fuels. Underlying replacement cost profit, a proxy for net profit, grew to $3.3bn in Q3, up from $2.8bn in Q2, fuelled by rising oil and gas prices. The London-based company delivered on its share buyback, announcing plans to repurchase $1.25bn of shares - that comes in addition to the $1.4bn share buyback announced when BP reported Q2 results. Divestment proceeds totalled $300m in Q3, bringing year-to-date proceeds to $5.4bn. The company expects the full-year figure to come in between $6bn and $7bn. Today’s Q3 numbers also showed that cash flow increased to $5.9bn, up from $5.4bn in Q2.

Despite strong growth in headline profit, BP reported a loss attributable to shareholders of $2.54bn due to accounting effects and hedges on forward gas prices, which are expected to unwind in Q4 as gas cargoes are delivered and prices stabilise.  

Looking ahead to Q4, BP is likely to continue to perform well, with oil and natural gas prices set to remain relatively high. Gas regions are expected to contribute strongly on higher demand, and over the medium term output in the Gulf of Mexico is set to ramp up after the disruption caused by Hurricane Ida.

Although energy demand will be high over winter, BP management need to have a plan that extends beyond simply returning cash to shareholders. The company can talk about “performing while transforming” all it likes, but it needs to prove to shareholders and the market that it can transition to renewables without hammering its margins, and the jury is likely to remain out on that in the near term. With energy prices at high levels, the company is in a sweet spot for cash flow and profit potential. It needs to capitalise on this opportunity.

BP's Q3 results build on solid recent performance

BP has recovered well since posting a whopping $6.7bn loss in Q2 2020. Back then, the company cut its dividend as it sought to manage a debt level of $50bn while oil prices were recovering from 20-year lows of $15 a barrel, and US prices went negative.

CEO Bernard Looney, who took control of BP in February 2020, inherited a poor hand from his predecessor Bob Dudley, who appeared reluctant to take the difficult decisions in repairing the balance sheet and weather-proofing it for the challenges ahead.

The signs have been pointing towards a transition to renewables for several years now, yet BP has continued to pay huge dividends without investing significant amounts in the move away from fossil fuels, as climate change moves up the political agenda.

There has been progress on the balance sheet, with debt now at $31.97bn in today’s Q3 numbers, down from $32.7bn in the first half of the year. However, the business still has some way to go before its reliance on crude oil and natural gas becomes less important, with capital expenditure still low, in relation to its peers, at $9.2bn year-to-date.

The sharp rise in both natural gas and crude oil prices in recent months has been extremely fortuitous for BP, as well as for the other oil supermajors, as it has helped the company build on a solid first six months of the year. The company had a decent half-year, as replacement cost profit came in at $5.4bn – BP's best performance since 2019 – and the company increased its dividend to 5.46 cents a share. When BP announced its Q2 results, it said that if Brent crude remains above $60 a barrel, there would be scope to deliver share buybacks of $1bn a quarter and to increase the dividend by 4% annually. BP seems to be honouring that commitment. 

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