BP stuck in neutral for now

Expectations were low going into the final quarter and full-year numbers and, unfortunately, BP (LSE:BP.) has duly delivered.

Weaker refining margins and lower volumes have been a mainstay of performance over recent quarters, despite BP’s assertion of a “cash balance point” of just $40 per barrel, which would normally imply a comfortable run at current levels. However, a replacement cost loss of $1.95 billion for the fourth quarter compares to a profit of $1.1 billion the previous year, and even at an underlying level a replacement cost profit of $1.17 billion was below the expected $1.26 billion and significantly shy of the $3 billion achieved in the corresponding period.

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At the headline level, the group achieved a profit for the year of $381 million, which pales into insignificance compared to last year’s $15.2 billion. Net debt has risen from $20.9 billion to $23 billion, despite the benefits of divestments totalling $2.8 billion, while the lower profit also impacts operating cash flow, which fell to $27.3 billion from $32 billion. BP is aiming to mitigate some of this pressure, and cost savings of $800 million for the year go some way towards an ambitious $2 billion target by 2026.

More positively, the sheer scale of the operation has enabled shareholder returns to continue at a high level, which has been central to the case of investing in the oil majors historically. The projected dividend yield of 5.6% is punchy by any standards, while BP has also announced a new share buyback of £1.75 billion alongside the numbers, and while there is no immediate danger of returns being reduced given a tough wider environment, such payouts are a drain on resources. 

According to the group, further improvements in performance, cash flow and returns are set to be revealed at the Capital Markets Update towards the end of the month, which will apparently herald “a new direction for bp”. Investors may be wondering whether they have been here before.

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At the time of the full-year numbers last year, the group was trumpeting its transformation from an International Oil Company to an Integrated Energy Company, with significant investment into the likes of renewables and electric vehicle charging seem set to remain for the foreseeable future, although in the meantime the vagaries of the oil price would inevitably bring their own challenges.

Amid this apparent strategic confusion, there are inevitable comparisons with the differing fortunes for Shell (LSE:SHEL), which remains by far the preferred play in the UK sector, let alone the US counterparts who have come up with a better solution having been dealt similar cards. The strategic update now takes on additional significance given the reported interest of stake building by serial activist investor Elliott Management, which traded higher yesterday as a result. 

In the meantime, the group’s own immediate outlook is somewhat uninspiring, as it estimates that the first quarter of the new year will see a continuation of the trends of lower upstream production and volumes. This comes alongside its aim of reshaping its portfolio and it remains to be seen whether any new direction will involve a reduction of investment in renewable energy, which has been observed to be both unprofitable in the near term.

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A slightly stronger oil price and the latest buzz of speculation around Elliott Management has resulted in the shares having spiked by 25% over the last three months. Even so, this has not been enough to prevent a decline of 3% over the last year, as compared to a gain of 16% for the wider FTSE100, and a drop of 17% over the last two years.

It seems most unlikely that the neutral view of the group will change ahead of the strategic update, with the market consensus confining the shares to a hold, albeit a strong one.