Why BP shares just hit a two-month high

BP (LSE:BP.) joins the throng of the other global oil majors in capping off a difficult year with a resilient performance which beat expectations on most metrics.

Financials aside, the permanent appointment of a new CEO removes one plank of uncertainty, and certainly for the moment the company will continue its transformation from an International Oil Company to an Integrated Energy Company.

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Its 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 will inevitably bring their own challenges.

There are also elements of strong comparatives, particularly in the fourth-quarter numbers, when the oil price significantly spiked following Russia’s invasion of Ukraine. Even so, BP is well prepared as a business to withstand the cyclical trials which follow a wavering price. With the oil price currently seemingly settled at around $78 a barrel, BP’s “cash balance point” of around $40 per barrel gives the group much scope for comfort.

The numbers themselves inevitably echo the themes which the other global majors have reported, such as a volatile price especially towards the end of the year, as well as lower industry refining margins.

For BP there was also some weakness in oil trading as a result of this volatility, but more positively stronger gas trading and marketing and higher oil realisations cushioned some of the financial pain. 

At the top line, a profit of $15.2 billion for the year compared with a loss of $2.5 billion the year previous, but the preferred metric for the sector tends to be underlying replacement cost profit, where BP posted $2.99 billion for the final quarter, compared to $3.3 billion in the third quarter and above expectations of $2.77 billion. The annual number of $13.8 billion was marginally ahead of estimates, but nonetheless was a sharp decline from the previous year’s $27.65 billion.

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Operating cash flow was another highlight for the quarter, coming in at $9.38 billion versus $8.7 billion in the previous three months, although for the full year a number of $32 billion compared with $40.9 billion in the corresponding period.

Net debt also reduced further to $20.9 billion, down from $22.3 billion in the third quarter and from $21.4 billion the previous year. Such cash generation has enabled BP’s financial largesse to continue to shareholders, where returns are a high priority.

The increase to the dividend compared to the previous year suggests a yield of 5.1%, a clear attraction for income-seekers, while a new share buyback programme of $1.75 billion was announced for the quarter, which is likely to be repeated in the next. Indeed, BP’s outlook also contains some punchy upgrades to shareholder returns, with buybacks expected to total at least $14 billion in 2025.

The more immediate outlook over the next quarter and indeed for the year as a whole guides that upstream production looks likely to improve, but lower industry refining margins could persist, albeit at a lower rate.

The group is keeping its foot to the floor on capital expenditure to fund its transition, with spending of $16 billion per year to continue at the very least in the years of 2024 and 2025. In the meantime, the industry as a whole is under increasing pressure to move away from traditional fossil fuels to cleaner replacement energies, and this has tended to weigh on the sector, not least of which in terms of historical valuations. With the move to renewables yet to prove consistently profitable or practical across many technologies, there are many challenges to be overcome. 

Even so, the oil majors remain an important constituent of many standard portfolios given their cash generation and high levels of shareholder returns when circumstances allow.

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The warm reaction to this BP update undoes some of the more recent damage to the share price, which prior to the results had fallen by 7% over the last year, as compared to a drop of 3% for the wider FTSE100 index.

There is clear progress being made in the transition and while Shell (LSE:SHEL) may remain the preferred pick, BP is snapping at its heels with a market consensus also coming in at a 'buy'.