BP is gushing cash during oil price boom

Its impressive ability to generate cash has had a significant benefit, not least for income-seeking investors.

The cash tills are ringing at BP (LSE:BP.) given the oil price headwind, but an accounting adjustment has driven a loss for the third quarter.

The adjustment relates to a hedge on higher gas prices which would unwind in the event of falling prices or the delivery of cargoes. Stripping this adjustment out, the underlying replacement cost profit for the quarter was $3.3 billion, comfortably ahead of expectations. It compares with a profit of $2.8 billion in the previous quarter and $86 million in the corresponding period last year.

BP’s prodigious cash generating ability has not only enabled the announcement of a further planned share buyback of $1.25 billion, but also a remarkable 20% reduction in net debt over the last 12 months, from $40 billion to $32 billion. Meanwhile, the dividend is being maintained, with the current yield of 4.3% a clear enticement to income-seeking investors.

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Production has also increased marginally year-on-year, with the company expecting previous production declines to ease as the year wears on. There are expected bumps in the road to come given the volatility of energy prices, higher expected seasonal maintenance activity and some lessening of demand, while the effects of Hurricane Ida are still being felt.

However, there is a larger target at play and BP is endeavouring to move towards its transformation at an accelerated pace. Divestment proceeds of between $6 and $7 billion are expected for the year as a whole, which will add further impetus to a strengthened balance sheet. The second strand of the strategy, distributions to shareholders, is also being swept along by the increase in cash flow. The third and perhaps most important move, however, is the company’s investment in its own transformation.

The oil majors have long recognised the need to provide renewable energy on a multi-decade view as opposed to the ultimately finite resource on which these companies were founded. For BP, this is partially driven by a move towards low carbon alternatives, although the cost of such a fundamental shift is a huge commitment over time.

For the moment, however, the current price of Brent oil of around $85 per barrel compares favourably with BP’s own projections which are based on a price of $60, let alone the “cash balance point” of $42 which the company previously identified.

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As such, ambitious though the targets are, there is progress being made on an incremental basis. The share price has not fully recovered to its pre-pandemic levels and remains down by 27% over the last two years.

Over the last year, however, there has been a significant improvement in fortunes, with a rise of 82% comparing to a gain of 29% for the wider FTSE100. There is little doubt that major challenges lie ahead, but the market consensus of the shares as a "buy" reflects the fact that BP is well-placed to maintain progress.