BP sticks to bumper cash return plans

“BP’s first-quarter profits are down year-on-year and lower than expected thanks in the main to lower gas prices and temporary problems at a refinery in Indiana, USA, although shareholders are unlikely to be too concerned given the company’s ability to return $3 billion to them via dividends and buybacks in just three months,” says AJ Bell investment director Russ Mould.

“BP is on course to return the same amount in the next three months of 2024 and if it maintains that pace for the whole year then the oil and gas major will return more than 11% of its stock market valuation to investors, a cash yield that easily exceeds Bank of England base rates, government gilt yields and inflation.

Source: Company accounts

“Income-seekers will want to make sure that such returns are affordable, if indeed BP offers them for all four quarters of 2024, and that the company is not cutting on capital investment or taking on debt to keep up the pace, as either move could weaken the company over the longer term.

“The good news is that free cash flow covered both the dividend and the buyback in the first quarter, although only just, thanks to the dip in profits and a working capital outflow.

Source: Company accounts

“Any reversal of the working capital outflow, or improvement in profits (thanks to the recommencement of operations of the Whiting refinery or higher oil and gas prices), would provide greater comfort, or even room for enhanced dividends – BP’s quarterly payment of 7.27 US cents a share is still some way below the 10.5 cents a share run rate that prevailed before the pandemic hit home in early 2020.

Source: LSEG Datastream data

“BP’s net debt position has crept up a little from its lows. Adjusting for pension assets, pension liabilities and leases, as well as cash, BP’s total net debt comes to $30 billion, compared to a low of $20 billion in Q3 2022. However, this figure is way down from the $60 billion peak of Q1 2020 and also represents just 35% of the company’s $85 billion in shareholders’ funds, so the balance sheet is far from stretched.

Source: Company accounts

“Investors who run strict screens based on environmental, social and governance (ESG) factors may be less impressed, especially as BP flags oil trading as an area of strength in the first quarter, and they will continue to watch the company’s new chief executive, Murray Auchincloss, for any signs of further adjustments to its long-term plans for reducing hydrocarbon production.

“BP’s goal to cut output by 2030, first outlined by the now-departed Bernard Looney in 2020, has been held against its shares, at least since the oil price started to recover in the wake of the pandemic as demand quickly rebounded. The stock trades at a discount to Shell, and also its major American counterparts, on an earnings basis and it offers a premium yield.

“It is tempting to think that a word about shifting its listing to New York could erase that valuation discount, but it is not quite so simple. The discount exists for a reason – be it BP’s spotty safety history, its renewables strategy or investors’ wider (if perhaps diminishing) aversion to sterling-denominated assets – but the company’s financial performance is not markedly inferior to that of its major quoted peers. If it can perform to that level and keep churning out the cash returns, the valuation discount may start to close.”

Source: Company accounts, Marketscreener, consensus analysts’ forecasts, LSEG Datastream data

Source: Company accounts, Marketscreener, consensus analysts’ forecasts, LSEG Datastream data

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