BP rose on Tuesday after the oil giant revealed the impact of lower oil prices in 2023 but pushed on with another bumper share buyback.
BP shares were 6% higher at the time of writing.
BP followed Shell’s lead as far as investors looked past falling profits and focused almost exclusively on an increased share buyback. BP announced an additional $3.5bn share buyback programme to be completed in the first half of 2024.
Lower profits at BP were telegraphed after energy prices slid in 2023, and the halving of Underlying Replacement Cost Profit to $13.bn in the full year would not have come as a surprise to investors.
Oil majors’ profitability is notoriously volatile and largely in the hands of underlying energy market pricing. As profitability swings dramatically, investors will be conscious of the company’s cash position and the ability to continue to grow distributions.
Looking at BP’s cash flow, shareholders have nothing to be concerned about. Despite operating cashflow falling in 2023 due to lower oil prices, BP increased shareholder payouts, maintained the same level of CAPEX as in 2022, and still ended the year with more cash in the bank than at the end of the prior year.
In many respects, the comparison to 2022’s earnings will be discounted by the market due to the war unfolding in Ukraine, sending oil prices above $100.
With oil prices falling back to the $70-$80 range, BP is now operating in an environment more representative of historical conditions and shareholders may feel comfortable with the macro influences on earnings going forward.
“The priorities of BP’s new CEO Murray Auchincloss have been made clear. Although on appointment he pledged that BP’s strategy to transition from an international oil company to an integrated energy company was unchanged, the big share buy-back announcement shows the immediate focus is on boosting the share price and returning value to shareholders. BP also said that shareholders would get a further $3.5 billion in buybacks in the months to come, and more in 2025,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.
“This strategy is being pursued even though BP reported a sharp drop in underlying annual profit from $27.7 billion to $13.8 billion as oil and gas prices were lower and refining profit margins also weakened.
“However, the company continues to generate highly impressive cash flows so there will be disappointment that BP is not using this strength to go farther and faster with its green transition. The emerging focus on cleaner forms of energy, are highly capital intensive but the dial is not being moved on capital expenditure guidance for 2024 of around $16bn and it looks likely to stay at a similar level till at least 2030. The focus is now going to be trained on simplifying the business, providing stability for investors, with what Auchincloss calls ‘more pragmatism’.”
