BP barrels off to brilliant first quarter, analyst angst over dividend
BP got off to a strong first quarter, with a £1.45bn profit and expectations of a "material improvement" in cash flow from the second half of the year as production begins at new upstream projects.
BP
491.65p
09:34 17/05/24
FTSE 100
8,404.86
09:35 17/05/24
FTSE 350
4,624.52
09:35 17/05/24
FTSE All-Share
4,577.15
09:35 17/05/24
Oil & Gas Producers
9,274.55
09:34 17/05/24
The oil colossus kept its quarterly dividend unchanged at 10 cents a share as $2.1bn of cash flowed from the production of 3.5m barrels of oil and gas per day, up 5% than same period in 2016.
Revenue of $55.56bn was well ahead of the $49.98bn analyst consensus forecast, with replacement cost profit surging surging to $2.6bn from a loss of $293m last time and adjusted earnings per share of $0.07 beating $0.06 expectations. The profit attributable to shareholders of $1.5bn was also ahead of a consensus estimate of $1.21bn.
The recovery in the oil price was a key element of the improved results, with Brent crude averaging $54.70 a barrel in the first quarter of 2017 compared to $35.3 a year before.
Management expect second-quarter reported production to be broadly flat with the first quarter, as the ramp-up of major projects is offset by seasonal turnaround and maintenance activities.
For downstream, improved industry refining margins are expected to be offset by narrower North American heavy crude oil differentials and a higher level of turnaround activity compared with the first quarter.
A $2.3bn payment was made in relation to the 2010 Gulf of Mexico oil spill, with the total in 2017 expected to total $4.5-5.5bn, weighted towards the first half, before falling to around $2bn in 2018.
Ignoring this payment, underlying cash flow would have been $4.4bn.
Bob Dudley felt the year has started well, with "robust" earnings and cash flow and stressed that BP was focused on the "disciplined delivery of our plans".
"We have shown continued operational momentum -it was another strong quarter for the Downstream and the first of our seven new Upstream major projects has started up, with a further three near completion. We expect these to drive a material improvement in operating cash flow from the second half."
The upstream business generated a $1.37bn replacement profit before interest and tax, up from the $747m loss a year ago and the $400m profit in the fourth quarter of last year; with downstream profits of $1.74bn falling slightly from the $1.81bn in the fourth quarter but up from $877m a year ago.
The upstream major project programme is on track to provide 800,000 barrels of oil equivalent per day of new production by 2020, with projects currently under construction said to be generally ahead of schedule and 15% below budget.
Notably, the Trinidad onshore compression project, the first of seven major projects scheduled to start up in 2017, began operation in April, with the Taurus and Libra development of the West Nile Delta project in Egypt ramping up and Quad 204 in the UK and Juniper in Trinidad & Tobago also nearing completion.
Looking at downstream, the marketing businesses continue to grow, with retail volumes increasing year-on-year and more than 30 new convenience store partnership sites added in the quarter.
BP opened its first retail fuels site in Mexico and announced plans to grow the network to around 1,500 sites in the next five years, with a retail joint venture agreement also signed in Indonesia.
Reaction and analysis
BP shares jumped 2.5% to 452.67p in the first hour of trading on Tuesday, but there was some angst among analysts over dividend cover and debt, especially if the oil price fails to rebound further.
The share price rise was not surprising, said analyst Naeem Aslam at Think Markets, as new investors were going to be attracted by numbers that smashed estimates.
He said Dudley's efforts to slash spending and and address the Gulf of Mexico spill and maintain the dividend during the toughest times was a "remarkable job", however, the stock performance has been the very poor, especially compared to its peers.
"The firm is still targeting the price of oil to be $60 by year end although it is likely that we may touch the level of $60 by year end but this is not an easy task by any means given that we have no cooperation by non-OPEC countries," Aslam said, forecasting "a cash funding shortfall in 2017 could remain a major challenge for the firm".
Russ Mould at broker AJ Bell noted that cashflow failed to cover the quarterly dividend for the seventh time in a row, despite a planned hefty cut in capital investment, which he said would "provide fuel to sceptics who argue that BP may have a difficult decision to make one day, if the price of oil fails to progress further - and even begins to drop again".
Having not cut its dividend since the 2010 disaster, no such decision will be taken lightly, he added, "and it seems unlikely that any such move is under consideration now".
He added: “If oil does not rise further BP will therefore have to fund the dividend with capital investment cuts, asset disposals (where the company has just raised $1.7bn of its $5bn-plus target for the year with a joint-venture sale in China) and potentially higher debt. Each of these could weaken the oil major’s long-term competitive position if deployed over a long period of time, to the potential long-term detriment of earnings power and the company’s valuation, in exchange for the short-term gain of maintaining the dividend."
Debt was the main worry for Michael Hewson at CMC Markets, up to $38.6bn from $30bn a year ago.
While BP has managed to return to profit due to improving revenues, cost cutting, and divestments, he said the breakeven oil price "may need to come down further, or the company will start to have to look at cutting the dividend".
"For several quarters the company hasn’t even got close to covering the dividend, and while interest rates remain low that may be sustainable in the short term, it’s certainly not sustainable on a long term basis, which means something may well have to give," he said.